If oil is priced above demand, there should be large supplies of unsold oil piling up in tankers.
Period, god damn it.
If there is no unsold oil piling up in tankers than oil is currently priced at the level where demand at that price equals the supply. You cannot blame commodity speculators for this!
My understanding is that during the last price speculation bubble, there were oil tankers piling up. If this is not happening now then commodities speculators have got nothing to do with it. Why is this so hard for people to understand?
It's so full that they're building more capacity to store more oil. The situation is the same in other parts of the world.
BTW, this is common knowledge for those who follow the commodities markets. Oil prices are high because of perceived risk of potential supply contraction due to instability in the middle east. It's a risk trade, i.e. speculation.
And if those speculators are right, people will be praising them for having the foresight to save oil for such a situation, which will lower prices compared to the speculation-free scenario.
Speculation could probably have negative effects on markets in theory, but it's so hard to take such claims seriously since they're rarely based on sound economics.
Speculation has had negative effects in practice: The tulip crisis. Sometimes speculation can turn into a pyramid game.
I'm not saying that this is always, or even often the case, but it is sometimes the case.
So somebody is paying nontrivial amounts to store oil that they think will be worth more tomorrow than today. If they're right, they win. If they're wrong, they lose money. If what they believe is true, they help us all and make a profit. If what they believe is wrong, they hinder us all and make money.
Where is the private incentive that is actually at odds with the public one?
Man, you take one microeconomics class and suddenly you have absolute certainty about the forces at play in the global commodities market.
Did it ever occur to you that maybe it's no public knowledge how much oil is piled up where within a month of Libyan hostilities breaking out? Or that the demand for oil may be somewhat inelastic? Or that information in the oil market is not perfect?
I mean I don't know shit about commodities markets, but yelling "god damn it" isn't a very convincing argument.
In simplest terms, the derivative (in this case, futures contracts) is causing the price of the underlying instrument (oil) to increase in price, because the value of the futures contracts themselves have appreciated due to inflation.
Analogy: let's say I'm Big Co and I want to lock in the price of oil at $90 per barrel in the next 6 months, so I buy a futures contract that will do this for me at a price of $5. If the price of oil increases to $100, then I would've saved my company $5 (price of oil at future rate - strike price - cost of contract).
On the surface, this is a good thing if:
a) There is a liquid market for such contracts
b) My company is actually buying and selling oil for the purpose of production of goods and services
Now, consider (a); it's precisely the problem he's describing. Because these banks have large positions in these contracts, it would be in their best interests to see the market value of the oil increase, since it would lead to a corresponding increase in the value of the contract. You can think of it in terms of an insurance "premium". For example, I would pay an insurance premium for my house, car etc because the intrinsic value is high, but an insurance premium for a bottle of water would be negligible in value.
The problem is made worse because the banks are not in the actual business of using oil to produce goods and services of economic value, but in fact have exclusivity to deal in these contracts.
Note that both the demand and supply side of the underlying oil itself has slight bearing on the actual value of these contracts. It's the volatility that determines the prices.
I thought this is only the case with contracts where the payoff is not linear, i.e. limiting the upside or downside. Future contract payoffs are linear f(t) = S(T) − K, so the upside is the same as the downside.
> the banks are not in the actual business of using oil to produce goods and services of economic value, but in fact have exclusivity to deal in these contracts
Can you talk more about the exclusivity here? That seems like a regulatory mistake.
I don't see your point and the authors point being completely contradictory.
The purported role of the commodities futures markets is to 'provide liquidity' to commodities producers and consumers and allow them to sell the production (and buy their needs) forward.
In fact the futures markets are completely dominated by speculation and leverage. Relatively few buyers and sellers of futures contracts either possess the underlying commodity or have a need for it in the future. Almost all futures contracts are rolled forward. There is much more 'paper' trading than actual commodities exist to back. When leverage is this cheap and loose, (i.e. you have more dollars being constantly created through various borrowing mechanisms) futures tend to be very choppy and whip the spot prices around.
The price you pay at the pump is being driven higher by people who neither own nor need oil, but rather have access to cheap leverage and do it because they can and it makes them money. (This is happening in almost every tradable commodity right now)
You seem to think that this is just the way the world works. But please realize that these are synthetic contracts that are being traded around: works of legal fiction. If the reason society allows people to trade in these contracts is supposedly due to help the market function more smoothly, why should we not consider alternatives to the current state of affairs?
Imagine if there was a futures clearing house and futures contracts could only be originated by commodity producers. (and then only in a decaying relationship to their forward production) The set of all futures contracts in existence would actually have some relationship to the forward production of the commodity. Imagine then that in order to purchase a futures contract you had to demonstrate that a) you had facilities available to take delivery of the commodity and b) that your business wasn't just to trade. (Note: the above will never happen) Do you really think commodities prices would be as volatile as they are today?
The poor and middle classes are more affected by rising commodity prices. Even if the bubble will eventually contract (which is what you seem to be saying) Why should they be they be subjected to this just so a hedge fund can make a killing for its customers?
I've read somewhere (yes, this is not a good source; it's more of a hint of where to look) that some markets are seeing longer-term futures, e.g. where previously futures would be sold 6 months in advance of actual delivery, they are now sold 24 months in advance. This is not as physical as oil in tankers, but not all that different.
Period, god damn it.
If there is no unsold oil piling up in tankers than oil is currently priced at the level where demand at that price equals the supply. You cannot blame commodity speculators for this!
My understanding is that during the last price speculation bubble, there were oil tankers piling up. If this is not happening now then commodities speculators have got nothing to do with it. Why is this so hard for people to understand?