SEARCH BLOG: SPECULATION
One part of the cost of oil... and other commodities... is speculation. There are several posts on this blog about this practice, including a letter from Sen. Carl Levin which you can find doing a search on this blog.
In May, the U.S. Senate heard testimony from Michael Masters, of Masters Capital Management regarding the impact of speculation.
What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.As a follow-up, this appeared in today's news:
These parties, who I call Index Speculators, allocate a portion of their portfolios to “investments” in the commodities futures market, and behave very differently from the traditional speculators that have always existed in this marketplace. I refer to them as “Index” Speculators because of their investing strategy: they distribute their allocation of dollars across the 25 key commodities futures according to the popular indices – the Standard & Poors - Goldman Sachs Commodity Index and the Dow Jones - AIG Commodity Index.
Study links oil prices to speculationSo, if you happen to have oil stocks or pension funds [including government pension funds] or perhaps just a mutual fund heavily invested in oil, you probably did pretty well during the run-up in oil prices. But now, $39 billion has been "withdrawn" from those markets.
By H. JOSEF HEBERT – 1 hour ago
WASHINGTON (AP) — An independent study of oil markets concludes that speculation by large investors was a primary reason for the surge in oil prices during the first half of the year and for the more recent price declines.
It said investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel and since then have withdrawn $39 billion from those same markets as prices have retreated.
Michael Masters of Masters Capital Management, which did the study, said the flow of money — not major changes in supply and demand — caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.
What's another word for "withdrawn?" "Lost?"
If you make money by speculating when the price of something goes up, what happens to your gains when it goes down?If speculators are positive feedback during a shortage, are speculators negative feedback during a glut... or even adequate supply? Should we look for $20 per barrel oil again? Or are these speculators simply riding the coattails of the marketplace... and taking a substantial risk if their $146 per barrel investment becomes $103 per barrel in the marketplace?
And will the government cover those losses?