How you can spend $6 and buy $100 of oil - why speculation is the reason

[Johnny Morales]

Commodity traders only have to put up $6 to "own" $100 worth of crude oil.

If that seems odd, perhaps the word "control" is a better word than "own".

Speculators are different from end users in that they NEVER INTEND TO TAKE POSSESSION OF THE OIL.

Their SOLE goal is to hang on to it, until the value of the $100 of oil they bought control of for $6 rises to their benchmark "sell" price, at which point their automated system sells their control to someone else.

This sort of trading was NOT allowed until it was legalized under President Bush (surprise).

The result has been a flood of money searching for things to buy.

Controlling it is simple, require speculators to put up the same amount it costs to buy stock on the Exchanges where a speculator needs to put up $50 to buy control of $100 worth of stock.

Needless to say the money people raced to switch from stock only to commodity speculation.

A simple comparison should help make it clear the extreme motivation speculators have to move from stocks to commodities in particular oil.

$50 invested in oil speculation will gain you control of $833 worth of petroleum.

That same $50 on the Stock market will only gain you control of $100 worth of stock.

It's really that simple.

The only reason all politicians pretend its mysterious is almost immediately when the rules were changed those who took advantage of it became instant billionaires and gained the influence that goes along with it.

My only question is how can I get into the game.

$6 I have that, and considering how the price of oil is rising, I could multiply that endlessly. :D

Thanks to the Guardian.co.uk for the essential info.

[EmmettKelly]

1. Prior to the Commodities Modernazation Act of 2000

margin requirements were typically in the 50% range and the Wall Street investment banks weren't allowed in the market. Just imagine how much air would go out of that bubble with a return to those rules.

[Egalitariat]

2. Can you link the article? Your facts are wrong.

You're discussing options. Namely Call options. Your statement of "That same $50 on the Stock market will only gain you control of $100 worth of stock" is completely bogus.

I could "control" $53,000 in Google stock for about $15 if I was dumb enough to buy the Jan 2012 $960 Call --> http://finance.yahoo.com/q/op?s=GOOG&k=960.000000.

And options have been traded on oil forever. That's how companies like Southwest Airlines "hedge" against future price increases.

I think your entire post is quite foolish and naive.

[EmmettKelly]

4. Actually he's right and not talking options

margin requirements are the amount of cash or equivalents needed to purchase a stock or futures contract. They are two different things.

Look up options and margin requirements.

[Broderick]

3. My take

It has to do with the value of the dollar in the global markets. shrug.

[Zoeisright]

5. I've been saying this for months.

And some people on this board ridiculed the premise that oil should not be a traded commodity.