Suppose I think the price is going to go up because the U.S. is going to invade Iran and set the Middle East on fire. So I buy oil futures for 12 month delivery, say, and so do all my buddies. So the price of those futures goes way up, which eventually finds its way back to the 6 month futures and then the 1 month and then the current pricing.
But one of these days I'm going to have to either take delivery of that oil or sell the contracts to somebody else. So there is risk in my plan, and somebody is holding the risk. Given the way bankers operate I doubt if it's them, so who is it?
Who is providing the gigantic amount of money that is supporting the purported speculators?
In all likelihood, BP and Goldman Sachs - who have been joined at the hip these last 10 years and have made an inordinate amount of their profits from energy markets - are central to this, so Hayward's comments are ironic.
The bottom line is that two thirds of global oil is priced against Brent Crude Oil. But not against the ICE Futures (formerly IPE) Brent contract, which is "cash settled" and therefore not deliverable at all.
The actual market price/ benchmark is that of "Dated" Brent, which is the market price - as assessed by Platts - of actual "spot" cargoes of North sea oil.
There are increasingly few of these cargoes, and I believe that it is not beyond the bounds of possibility that traders like BP and Goldman Sachs - acting opaquely in concert on the ICE platform they own and control - could not keep the price levels of Brent artificially high using forward "15 day" Brent contracts and CFD's (contracts for difference) as leverage, and buying up whatever level of stocks are necessary to keep the price up.
This is especially so if the market perception is that the price should be at those levels - and Goldman has been assiduous in its forecasting of "spikes" and ever increasing prices.
The US West Texas Intermediate ("WTI") contract on the other hand - which affects the US more directly - is of course deliverable, and there is a massive regulatory furore about the fact that while there are speculative limits on the number of NYMEX WTI contracts, the trading in London on the ICEFutures platform - which now accounts for 30% of WTI trading, has no speculative limits.
Personally I think that focusing on this is irrelevant. In fact we recently saw how speculators had swung to net short positions and then got "burnt" by a rapid rise in price.
The bottom line is that upon the expiry of deliverable contracts the futures price converges on the physical price and NOT vice versa. So the only way to manipulate the WTI market is to hoover up the storage and pipeline capacity and play games with forward contracts.
In other words, I think that speculation on futures markets has nothing to do with the market price and gyrations: the skulduggery is going on among the players who trade and control the physical market.
So I smile when I read BP's Hayward advocating market solutions, when IMHO BP has been busily "acceptably" (it must be "acceptable" because unacceptable manipulation is a felony) manipulating global oil markets generally, in all probability in cahoots with Goldman Sachs.
But the whole talk of speculation, in general, smacks of a desperate attempt to blame some nasty intervention by evil players for oil prices (which would otherwise be 'normal' and all could go on as before) rather than fundamental changes that will require us to actually change our behavior significantly. In the long run, we're all dead. John Maynard Keynes
I think the kind of structural speculation Chris is describing is much more likely.
Don't forget that gas prices miraculously dropped in the run up to the 2004 election, and started picking up soon after. So I think we can take market manipulation for granted. And given that prices are partly based on futures, it has to be entrenched and systemic manipulation.
So if the 'physical price' - which is an odd concept - is being set deliberately by systemic manipulation, it becomes an input and not an output variable. Prices will stay high because the monopolists want them to, and 'physical price' becomes an irrelevance.
When the casual speculators are getting burned for underestimating the price, it's unlikely their kind of speculation is important.
I'm agnostic about what types of speculation are driving things, but lets not pretend that this is all just about simple demand and supply.
lets not pretend that this is all just about simple demand and supply.
On whose side should the burden of proof be? In the long run, we're all dead. John Maynard Keynes
On the other hand, Jerome rightly points out that on more than one occasion a rally has been caused by speculators rushing out of big bets that the price will go down. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
This is definitely not what is happening with oil and commodities. In the long run, we're all dead. John Maynard Keynes
There is a big element of denial here in the attempt to blame "speculators".
Clearly we are seeing a "phase transition" here - and accompanying turbulence - in a move from a structurally over-supplied "buyers' market" to a structurally under-supplied "sellers market".
But don't forget that while the sell side have an interest in higher prices, and the buy side in lower prices, the trading intermediaries make more money from high prices (assuming constant margins) and also have an interest in market volatility (where they profit at the expense of hedgers).
So I think the tendency will in future always be towards excessively high prices, with occasional lurches back to the "reality" of the "true" market clearing price whatever that is.And never ending excessive volatility of course.
We need to entirely reconfigure - and dis-intermediate - global markets, and such dis-intermediation is a logical consequence of the Internet in any case.
This would mean a transition - which is already visible - of oil companies to service provision.
It would also mean a market architecture where speculators and intermediaries are structurally unable to participate in physical market price formation.
I believe that this is possible too, and it would involve a market where "deficit-based" time constrained (ie dated) futures contracts are superseded by new forms of (undated) "asset-based" security.
