Speculation & Crude Oil

I have maintained for a while that oil prices (and perhaps other commodities as well) are being driven higher not by the laws of supply and demand, but by the moves of speculators. This morning the Dow Jones news-wire reported the following.

OPEC member Iran is storing about 25 million barrels of heavy crude oil in tankers in the Persian Gulf. The country expects to move the stored crude by the end of the second quarter or early in the third quarter, an official from the National Iranian Oil Co. said Wednesday.

In other words, there is so little demand that they have completely used up their on shore storage capacity and don’t expect to clear this inventory until October. Clearly it is time for Senator Byron Dorgan’s Bill to raise commodity margin requirements. All of this talk from our President and others about third world growth being responsible for dramatically higher commodity prices is nonsense. It’s his old friends in the trading pits that are responsible for creating yet another bubble. Is it possible that our new reliance on finance (as opposed to production) as the engine of our economy requires us always to create speculative bubbles? First Internet stocks, then housing, now commodities.

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0 Responses to Speculation & Crude Oil

  1. alex says:

    I agree with this sentiment, but I worry that too much of this “bash the speculators” will end up by too much regulation… Speculation is an integral part of a healthy commodities market.

  2. Jon Taplin says:

    alex- I’m not saying don’t speculate. I’m just saying you can’t speculate with 80-90% on margin.

  3. Morgan Warstler says:

    Jon, that’s just plain dumb. If there’s no demand you leave it in the ground. The REAL reason is much worse. From an email I got yesterday, and alluded to in your blog:

    “Purportedly the governments of the Islamic Republic of Iran and the Bolivarian Republic of Venezuela are engaged in a major covert effort to keep the world’s oil tanker fleets from carrying petroleum to the thirsty global markets that need it. This is according to reliable sources who monitor the tanker industry, and sources within the American law enforcement community. The Iranian government has leased and engaged the bulk of the available supertankers, and smaller vessels and is storing oil in ten of them in the Persian Gulf, and eeping others idle whilst under lease or charter. The government of enezuela is allegedly assisting Iran in this manipulative practice, which has resulted in the tripling of the daily charge for tanker use since April, because of a fifty per cent drop in vessel availability during the next thirty days, this is according to authoritative industry sources. Is this the functional equivalent of a declaration of economic war against the United States? What will the response be, and when will it occur?

    Here is what we know so far:

    * A large number of tankers lie at anchor in the Persian Gulf, and elsewhere, all leased by Iran and Venezuela, and all therefore unavailable to carry oil for other prospective charter clients.

    * Iran has also commenced to lease tankers in the spot, or single-trip, market, where it had previously used only its own vessels. This of course, is a deliberate act to tie up additional tankers. Its transparent claim, that it is storing grades of oil which have low global demand, cannot be taken seriously, as all levels of quality are urgently needed for the increased consumption rate.

    * Venezuela has a classified agreement with Iran that requires it to engage available tankers, in support of the Iranian objective, which is to delay, and ultimately, deny oil shippers transport to needy consumer markets, thus driving up oil prices to stratospheric levels, and benefitting both countries financially. Notwithstanding its own oil revenues, Venezuela’s economy is in a shambles, and its government has distributed both large amounts of dollars and free or discounted oil, all to fund radical political movements in Latin America. It is in desperate need of more money, and this dark maneuver could accomplish this, though at a high cost to the rest of the world.

    The Iranian scheme will not only disrupt global markets, it could cause serious economic distress in both North America and Europe.

    Since we know that the US government is aware of the scheme, it should also be assumed that they have planned an adequate response, whether it be major regulatory sanctions, universal economic sanctions, limited military action, or even general war.

    At this point, country risk evaluators must assume the worst, and create contingency plans to respond to any of these possibilities, no matter how remote the chance that they may occur.”

    Now that I have helped you analyze this situation, perhaps you’ll rescind your silly its all the speculators, YES we want to cut down speculators, but the OIL IS BEING WEAPONIZED BY OUR ENEMIES.

    Please Jon, grow up.

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  5. Jon Taplin says:

    I’m sorry Morgan, you are talking through your hat. Crude Inventories are up worldwide.

  6. Morgan Warstler says:

    Jon, I read that entire article, and obviously you didn’t, becuase nothing in it even supported the headline, to wit:

    “The US Energy Information Administration (EIA) said Wednesday that American crude oil reserves rose by 200,000 barrels in the week ending May 9. That was less than market expectations of a gain of 2.25 million barrels.

    The EIA added that American gasoline stockpiles fell by 1.7 million barrels, which was heavier than analysts’ consensus forecasts for a drop of 200,000 barrels.

    On Tuesday, the price of New York crude struck a record high of $126.98 a barrel on Tuesday despite new predictions of slower demand growth for energy, traders said.

    The International Energy Agency cut its forecast for growth in global oil demand.

    The Paris-based IEA predicted in a monthly report that crude oil demand in 2008 would stand at 86.8 million barrels per day (bpd) – about 390,000 bpd less than a previous estimate given in April.

    The energy monitoring agency also said it now estimated world oil demand in 2007 at 85.8 million bpd.

    “The oil market has been holding steady since it rose yesterday [Tuesday] … on concerns about distillate tightness in the market,” said Victor Shum, an analyst at Purvin and Gertz energy consultancy in Singapore.

    Along with an inflow of investor funds, analysts have cited a variety of factors for this year’s price spikes, including rising energy demand from Asian powerhouse economies China and India, and OPEC’s refusal to pump more crude.”

    Oil reserves grew far less than forcast and gas reserves actually fell. Demand is falling “slightly” in the face of hgh prices, but that’s not leading to a glut of crude inventory.

    I’m not talking out of my hat. Iran and Chavez are buying up tankers, and you want to blame the rich baddies, instead of protecting US interests. What’s the matter with you?

    You totally mis-read the tanker thing. Oil can stay in the ground, there’s only one reason to buy up all the tankers, and it isn’t becuase no one wants to buy oil.

    Quit supporting our enemies.

  7. Adam says:

    If it is speculators driving the oil price rise, the corrolary should be that physical holders of oil would be spending big $$$ buying put contracts (or writing calls) at current prices to ensure that when they extract/deliver oil in the coming months/years they can lock in high margins.

    Is there any evidence that this is occurring? Anyone out there have access to appropriate data?

  8. Jon Taplin says:

    Morgan-If you read the post from my friend in South America, even the oil ministries are playing the futures game. This commodity bubble will burst and the smart guys will be selling short. Your paranoia is getting the best of you.

    Also please answer my latest question to you here:

  9. Azmanon says:

    T. Boone Pickens claims rising oil costs are due to supply not being able to meet demand. He’s a guy who stands to benefit a lot from speculative deals, yet his position on reducing foreign oil dependency and developing alternative energy sources seems contradictory to his own oil investments. Maybe he’s preparing for a bursting bubble? Its hard to know what to believe.

  10. WHNO says:

    “This commodity bubble will burst and the smart guys will be selling short. Your paranoia is getting the best of you.”

    Agree – for some reason on/around 141 a barrel seems to be the magic number (intuition) — the major buyers recently will sell BIG and immediately short — I suspect the price will bottom out under 100 (80 – 95) — might be a more major dip (flip side of speculation) at which time those of us who heat with oil should LOCK IN!

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  13. Thom Dowting says:

    The Economist says that the tankers aren’t carrying “light sweet” but rather are weighted with the heavy because the market for heavy is glutted, a result of domestic U.S. refineries switching to petrol production.

    I tried to link to the Economist.com article but the on-line version is different than the print version.

  14. Asfand says:

    I’m sorry Morgan, i don’t agree with you… as there is no supply problem in the world, you can go anywhere and fill you cars tank.. oil is available in each and every oil station which shows that the actual problem lies in the paper economy.. as far as physical trade is concern oil is available all around the world without any delay…

  15. cousinarlo says:

    That is a good point Asfand.

    When I think about rapid price increases of various products I also think of shortages. What we seem to have now is plentiful supply AND high prices, which is not the supply/demand economics I learned.

    I would argue that oil, being a necessity, should not be traded like pork bellies anyway. Every human being is harmed when speculators jack up oil prices. Their BS about “supply risks” is wearing thin.

    Why don’t speculators grow some balls and buy and sell the real product, not some lawyer-invented, leveraged “currency” they can increase by telling us they’re afraid of something every day?

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