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Discussion Starter #1
What are your opinions on whether speculators in the commodity markets are what is driving up the price of oil? I believe that this is not the reason for increased oil prices.

An option is a type of contract that is used in the stock and commodity markets, in the leasing and sale of real estate, and in other areas where one party wants to acquire the legal right to buy something from or sell something to another party within a fixed period of time.
In the stock and commodity markets, options come in two primary forms, known as "calls" and "puts." A call gives the holder of the option the choice of buying or not buying stock or a commodities futures contract at a fixed price for a fixed period of time. A put gives the holder the option of selling or not selling stock or a commodities futures contract at a fixed price for a fixed period of time. Because an option only has value for a fixed period of time, its value decreases with the passage of time. Because of this feature, it is considered a "wasting" asset.

Purchasing a call option simply amounts to a bet that a particular commodity will rise in value. By contrast, a put buyer is anticipating that an underlying commodity is poised to fall.

For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited.
 

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No, of course not. That's political pablum, fed from one talking head to another.
 

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Speculation is part of the "free markets".... If we end speculation, might as well close up all the financial markets. If we end speculators, we'll dry up liquidity...
 

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You cant rule them out completely, they do have a strong hold on money matter.

But seriously the supply/demand situation is bad and I blame the people in charge of oil distribution and I blame the process.


America consumer a BIG chunk of world production and pays the same price which i think is stupid.
 

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Discussion Starter #5
You cant rule them out completely, they do have a strong hold on money matter.

But seriously the supply/demand situation is bad and I blame the people in charge of oil distribution and I blame the process.


America consumer a BIG chunk of world production and pays the same price which i think is stupid.
Let me explain how the commodity market works. A speculator buys a 'call option' on oil (Purchasing a call option simply amounts to a bet that a particular commodity will rise in value). He bases his purchase on what data is available to help him decide if the price of oil will rise or fall.
Let's say I purchased a 'call option'. Yesterday Iran test fired missiles and they fired more again today. They have threatened to destroy Israel and close the Strait of Hormuz if they are attacked by Israel or the USA. This causes all of the oil available on the market to be bought up in case a conflict causes a temporary halt in the oil supply. The demand exceeds the supply and the price rises. In this scenario I sell my option and make money.
If instead of what actually happened Iran was to tell the UN that they would halt their nuclear program, abide by all UN resolutions, end all missile testing and sign a treaty with Israel there would be stability in the region and the price of oil would fall. I would lose all the money I had used to purchase the 'call option'.

My purchase (bet) of a 'call option' has no more influence on the price of oil than a bet I placed on a team in the Super Bowl would have an influence on the outcome of the game.
 

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My purchase (bet) of a 'call option' has no more influence on the price of oil than a bet I placed on a team in the Super Bowl would have an influence on the outcome of the game.
I'm not sure why you're just focusing on options. Speculation can take many forms, including futures and spot purchases.

However, that statement isn't really true. When you buy an option, you are buying some quantity of the underlying asset. This quantity is given by the nominal size of the option contract (which is really an option on a future) multiplied by a hedge ratio, known as the delta. Option market makers, who are ultimately on the other side of your transaction, have to delta-hedge their short position, which implies buying the underlying asset. In addition, they are short volatility, which means that the delta increases in value as the market continues trading up, forcing them to continue buying to maintain a market neutral position. For the record, I traded fixed-income options professionally for several years, with a multibillion Dollar position.
 

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while I agree with Alan's comments, there is much more to the price of a commodity. As we all know, oil is used now as a hedge against dollar-denominated assets, so if we wanted to blame "speculators",should we blame those who are speculating that the dollar will continue to decline?
 

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I also think the oil market trades like it's short (the speculators). This observation is based on the way it moves, i.e., explosively on the upside and reluctantly downward. A perfect example is today. After backing off for a few days, it suddenly shot up $6 today on a little news unrest in Nigeria.

When I say the market is short, what I really mean is the weak hands. A cardinal rule of market psychology is that financial markets will do whatever f^&ks the most people. In actuality it f^&ks the weak hands, kind of like a poor idiot without a pot to piss in playing poker with a bunch of billionaires. The true quantity of shorts and longs in a futures market is equal; this is called the open interest. However, if you operate from the premise that there's an imbalance of speculators on one side of the market, the other side will have a greater balance of strong hands, for example refiners or even commodity index funds who aren't concerned about meeting margin calls. I do think there was probably some supply imbalance driving up the cost of oil initially, but at $140/bbl it's gone way past that. As the short (weak hands) get caught on the wrong side, they need to go back and cover their shorts in a hurry to limit their losses or meet margin calls. As the market continues to explode, more and more speculators get caught short, including those who sold to the original shorts with margin calls and the whole cycle keeps feeding on itself.
 

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I know what options are, as well as future I play with them all the time, some of my my options are expiring on the 17th this month.

My answer is the same, short term, yes these do affect prices but long term a couple of things have gone wrong. One is Bush, one of the stupidest people in power (this guy has no strategic sense whatsoever). Second is how oil prices work, america had a sweet ride for a VERY LONG time but then bush F-ed up, so the simple supply demand worked its angle and made things expensive for the whole world.
And now (I know futures too, plus my dad works with oil) because oil distribution is just a single supply demand instead of country specific(ie. if america uses 1/3 of the world's oil it should be paying a gradated price instead of flat rate) by the end of the year oil prices should be awesomely good (expensive). SO yeah, if you have money for futures, play with it, I guarantee you'll make money, but put atleast 50-60k (oil futures, not an oil company, they're accruing losses bigtime).

Where were you when I was 17 and didnt know about options (and was high in Econ 101)?

Let me explain how the commodity market works. A speculator buys a 'call option' on oil (Purchasing a call option simply amounts to a bet that a particular commodity will rise in value). He bases his purchase on what data is available to help him decide if the price of oil will rise or fall.
Let's say I purchased a 'call option'. Yesterday Iran test fired missiles and they fired more again today. They have threatened to destroy Israel and close the Strait of Hormuz if they are attacked by Israel or the USA. This causes all of the oil available on the market to be bought up in case a conflict causes a temporary halt in the oil supply. The demand exceeds the supply and the price rises. In this scenario I sell my option and make money.
If instead of what actually happened Iran was to tell the UN that they would halt their nuclear program, abide by all UN resolutions, end all missile testing and sign a treaty with Israel there would be stability in the region and the price of oil would fall. I would lose all the money I had used to purchase the 'call option'.

My purchase (bet) of a 'call option' has no more influence on the price of oil than a bet I placed on a team in the Super Bowl would have an influence on the outcome of the game.
 

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I also think the oil market trades like it's short (the speculators). This observation is based on the way it moves, i.e., explosively on the upside and reluctantly downward. A perfect example is today. After backing off for a few days, it suddenly shot up $6 today on a little news unrest in Nigeria.

When I say the market is short, what I really mean is the weak hands. A cardinal rule of market psychology is that financial markets will do whatever f^&ks the most people. In actuality it f^&ks the weak hands, kind of like a poor idiot without a pot to piss in playing poker with a bunch of billionaires. The true quantity of shorts and longs in a futures market is equal; this is called the open interest. However, if you operate from the premise that there's an imbalance of speculators on one side of the market, the other side will have a greater balance of strong hands, for example refiners or even commodity index funds who aren't concerned about meeting margin calls. I do think there was probably some supply imbalance driving up the cost of oil initially, but at $140/bbl it's gone way past that. As the short (weak hands) get caught on the wrong side, they need to go back and cover their shorts in a hurry to limit their losses or meet margin calls. As the market continues to explode, more and more speculators get caught short, including those who sold to the original shorts with margin calls and the whole cycle keeps feeding on itself.
yeah, alan, we've been discussing the merits of TA on another thread. As the resident full-time technician here, it's nice to have someone else here who understands how TA works...

a small clarification to your passage is that the aggressive of the market participants affects the trade more so than the quantity of the longs and shorts. Sounds like a nebbish point but it matters.
 

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I agree with EZmoney. At a company I worked for, we hedged our dollars against the Euro with futures. It did not influence the exchange rate, we were simply limiting the currency losses we would incur if the dollar devalued. Boy did it ever, and we were temporarily saved. But it did not make the dollar fall in value at all.
 

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Oil drops $10 in 2 days. This is probably due to "speculators". How come i don't hear people bitching about speculators when prices drop?

Oil tumbles again; prices fall over $10 in 2 days: Financial News - Yahoo! Finance

Oil ends sharply lower for second straight day, dragging prices down more than $10 this week


NEW YORK (AP) -- Oil prices settled sharply lower for the second time in a row Wednesday, leaving crude more than $10 cheaper in just two days of frenzied trading and prompting speculation that the hard-charging market may be running out of steam.
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Light, sweet crude for August delivery fell $4.14 to settle at $134.60 a barrel on the New York Mercantile Exchange, after earlier sinking as low as $132. The drop follows a $6.44 sell-off Tuesday, crude's biggest since the Gulf War.

The two-day slide of $10.58 a barrel marks a dramatic turnaround in crude prices, which as recently as Friday traded at record highs above $147 a barrel. But even with this week's sell-off, prices remain about 80 percent above where they were a year ago and up about 40 percent from the start of the year.

Analysts are unsure whether the drop represents a long-term shift in sentiment or simply a brief correction to crude's monthslong bull run. But the dizzying decline is prompting market veterans to ask how much support remains for such high prices.

"It's a sign that maybe the bull market is losing strength," said Michael Lynch, president of Strategic Energy & Economic Research Inc.

Perhaps just as significant as the declines was the sudden increase in volatility. Prices whipsawed by more than $10 Tuesday and $7 Wednesday ahead of the expiration of options contracts this week.

"I think anyone you talk to would have to be surprised by the magnitude of these huge price swings. This is extreme price volatility that no one can predict," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Such large up-and-down swings, he added, can indicate the market is nearing its top.

Sharply increased crude and gasoline supplies were the immediate cause of Wednesday's decline.

The Energy Information Administration reported that U.S. crude oil supplies rose by 3 million barrels, or 1 percent, last week. That is the opposite of the 3 million barrel draw analysts surveyed by energy research firm Platts expected. Gasoline supplies also leapt unexpectedly.

"The numbers were decidedly bearish on just about all fronts," Ritterbusch said.

Industry observers cautioned that prices could still bounce back, just as they have following large drops in recent weeks.

"I do expect this bubble to burst. Is this is it? It might be ... but I'm not ready to say so yet," analyst and trader Stephen Schork said.

A number of market participants speculated that at least some of the week's sell-off was the result of cash-strapped banks selling energy contracts to raise money for other needs.

And widely used computers programed to sell once prices fall to certain thresholds can accelerate declines, much as an avalanche gains steam the further it slides.

"It absolutely adds a cascading effect," Schork said.

Yet concerns are growing that high energy prices are leading to real shifts in consumer behavior that could cause demand to shrivel considerably.

The Labor Department said consumer prices shot up 1.1 percent last month, the second fastest pace in 26 years. Rising energy prices accounted for two-thirds of that increase, which was far worse than expected.

Testifying before Congress for the second day, Federal Reserve Chairman Ben Bernanke said central bank policymakers are facing "significant challenges" in righting the troubled U.S. economy, which is being buffeted by weak growth and inflation driven largely by rapidly rising food and energy prices.

"This is clearly a rough time," Bernanke said. "It is clear (economic) growth has been slow and the labor market is weak. So conditions are tough on average families."

American Airlines and Delta Air Lines, two of the three biggest U.S. carriers, each reported a loss of more than $1 billion in the second quarter, largely because of higher fuel costs.

"With each passing day, we are reading about more car companies cutting back on production, airlines slashing flights, and consumers driving less," said Edward Meir, an analyst at MF Global. "Of course, these are not new factors, and energy markets have ignored them for several months now as they have relentlessly pushed higher, but we suspect that as the pace of demand destruction accelerates it will be harder to ignore."

The dollar strengthened against the euro, giving traders less reason to go bargain shopping in the suddenly discounted energy market. A weaker dollar has enticed investors to buy oil and other commodities as hedges against inflation and a weakening dollar, but that incentive diminishes when the dollar gains ground.

It will be some time before any declines -- assuming they hold -- show up at the gas pump, where prices continued to advance.

U.S. retail gasoline prices added half a cent to $4.114 per gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Diesel prices also marched higher, up nearly a penny to $4.839 a gallon.

In other Nymex trading, heating oil futures shed 7.8 cents to settle at $3.841 a gallon while gasoline futures lost 10.54 cents to settle at $3.2794 a gallon. Natural gas futures fell 7.9 cents to settle at $11.398 per 1,000 cubic feet.

August Brent crude fell $2.56 to settle at $136.19 a barrel on the ICE Futures exchange in London.
 

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Ummm, maybe that's bc speculators dont use any oil, and therefore never reduce demand They have to sell it b4 taking delivery. Duh.

(I know u know this answer... just like being facetious!!)

:)
 

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Discussion Starter #15
Oil drops $10 in 2 days. This is probably due to "speculators". How come i don't hear people bitching about speculators when prices drop?


Sharply increased crude and gasoline supplies were the immediate cause of Wednesday's decline.

The Energy Information Administration reported that U.S. crude oil supplies rose by 3 million barrels, or 1 percent, last week. That is the opposite of the 3 million barrel draw analysts surveyed by energy research firm Platts expected. Gasoline supplies also leapt unexpectedly.

Yet concerns are growing that high energy prices are leading to real shifts in consumer behavior that could cause demand to shrivel considerably.

American Airlines and Delta Air Lines, two of the three biggest U.S. carriers, each reported a loss of more than $1 billion in the second quarter, largely because of higher fuel costs.

"With each passing day, we are reading about more car companies cutting back on production, airlines slashing flights, and consumers driving less," said Edward Meir, an analyst at MF Global. "Of course, these are not new factors, and energy markets have ignored them for several months now as they have relentlessly pushed higher, but we suspect that as the pace of demand destruction accelerates it will be harder to ignore."
The market has reached its 'tipping point' and there has been a large reduction in demand. The airlines have parked hundreds of planes and people are driving less. The speculators (with call options ) will take a big hit.

The market is correcting without the need of government intervention (which would just screw up eveything).

Yet concerns are growing that high energy prices are leading to real shifts in consumer behavior that could cause demand to shrivel considerably.

Who would have these concerns?????? I thought that was a goal to reduce the use of petroleum.
 

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Why is oil up so much? One word;




BUSH
One word for you: ENVIRONMENTALISTS

they've influenced politicians for decades (both directly and through the grassroots) to prevent oil drilling (both on and offshore), nuclear power expansion, coal, and oil shale mining. That leaves us with - windmills and solar - which together cannot run a country like the US.
So, while Bush hasn't been nearly forceful enough in getting the ball rolling on proven, viable sources of home-grown energy, I'm not sure how you can prove that he has single-handedly forced the price of gas up.
And neither the current White House occupant or the two others hoping for the job have any plans for strengthening the devalued dollar, which is also a factor in the high price of gas
 

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And neither the current White House occupant or the two others hoping for the job have any plans for strengthening the devalued dollar >> u might wanna check on this. If Obama reduces spending my withdrawing troops (I said "IF") then of course the dollar would increase in value.
 

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And neither the current White House occupant or the two others hoping for the job have any plans for strengthening the devalued dollar >> u might wanna check on this. If Obama reduces spending my withdrawing troops (I said "IF") then of course the dollar would increase in value.

....and increases spending everywhere else like he wants to....

Thats not really a plan to strengthen the dollar.
 

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Discussion Starter #19
One word for you: ENVIRONMENTALISTS

they've influenced politicians for decades (both directly and through the grassroots) to prevent oil drilling (both on and offshore), nuclear power expansion, coal, and oil shale mining. That leaves us with - windmills and solar - which together cannot run a country like the US.
So, while Bush hasn't been nearly forceful enough in getting the ball rolling on proven, viable sources of home-grown energy, I'm not sure how you can prove that he has single-handedly forced the price of gas up.
And neither the current White House occupant or the two others hoping for the job have any plans for strengthening the devalued dollar, which is also a factor in the high price of gas
Good reply. I get tired of people that think that American history started in January 2001 when GW Bush took office. This problem has been around for at least 30 years. Perhaps the price of gasoline has reached the (tipping) point and people will keep up the pressure on the government to allow us to use all of our resources and seek new renewable sources at the same time. That will help to strengthen the dollar, reduce inflation, produce new jobs, and reduce our dependence on our enemies to provide us with the energy to not just maintain but to grow our economy.
 

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It's scarry to think what would happen if something goes bad in the Middle East right now. We will be at $8 a gallon before you know it. At least if we are producing the majority of our own oil we would have some control.

Theres something I don't understand - the Dem's keep saying that the oil companies have huge leases on land that they are not developing and use this as an excuse not to open up offshore drilling. The oil companies state that exploration on this land would be just that "exploration" and off shore drilling is more of a "definite".

If this is true - why don't they just offer to give up the leases in return for the offshore drilling? I have not heard one Republican or Oil Company representative respond to this.
 
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