Are Speculators 'Doubling' Gas Prices?
Monday June 23, 2008
According to this article some 'experts' believe this to be the case:
Take the set of oil futures that matures at a certain date - say May 15, 2008. Just before those futures mature, the 'speculators', as far as I can tell, only have two options: either sell the futures (because they have no way of selling the oil) or pay for the oil but refuse to collect it. What other alternatives are there?
So here there really is not a time t+1 as Garth describes.. or at least not one I am seeing. I suppose the 'speculators' could make an arrangement to trade their current future for one which matures 2, 4, 6 etc. years from now. But is there any evidence they are doing this?
Basically, the experts say, there isn't a supply problem; there's plenty of oil.While I find it plausible that speculators started the ball rolling on oil price hikes, I do not believe eliminating them from the market would do much to change the spot price of oil, as I explain in Would Oil Prices Continue to Be So High If We Got Rid of All the Speculators?. Though Garth Brazelton makes a good point when he states:
Speculators now account for 70 percent of crude oil trading on New York's commodities exchange. The price of a barrel of oil, which rose to almost $138 on Monday, does not reflect market fundamentals.
Oil analysts told the House Energy Subcommittee on Oversight and Investigations that what Americans are paying at the pump has been bid up to twice its actual value.
Also, could it further be that once you add ‘time’ into the mix, that prices temporarily rise at time t as speculation occurs, then as people sell back their futures as you suggest we would expect prices to fall, but by that time the seeds of a bubble have set in causing MORE speculators to enter the market at time t+1 meaning that prices actually appear to rise continually until such time that the bubble bursts. I think that is a pretty likely scenario.That explanation makes a lot of sense to me, but there is still one piece of the puzzle I need reconciled.
Take the set of oil futures that matures at a certain date - say May 15, 2008. Just before those futures mature, the 'speculators', as far as I can tell, only have two options: either sell the futures (because they have no way of selling the oil) or pay for the oil but refuse to collect it. What other alternatives are there?
So here there really is not a time t+1 as Garth describes.. or at least not one I am seeing. I suppose the 'speculators' could make an arrangement to trade their current future for one which matures 2, 4, 6 etc. years from now. But is there any evidence they are doing this?
Comments
Long speculators continually roll their long position forward at expiration time. I don’t have direct experience with oil markets but in grain markets long speculators have held onto their long positions for as much as 4-5 years. When their futures come due they sell the near by contract and purchase a more differed contract. This has no effect on the current price since they are both buying and selling the same amounts. The effect is on the relative price of the nearby contract versus the deferred. This is why grain markets have been at or near carrying charges at expiration for years now. The cost to the long speculators has been that each time they roll their position forward they pay more for the deferred contract than they sell the nearby contract for. In doing this they have been in effect paying farmers, grain companies and others to store grain and hold it. I would be surprised if something like this has not been going on in the oil markets.