OK all you Oil Futures trader supporters...

[Gary - K7GLD]

EDUMACATE ME! :-laf:-laf



I can understand futures trading on agricultural goods and others where supply/demand tend to vary widely in a given period - and futures trading sorta smooths out the seasonal flow between producer and final customer - but in the case of oil, where's the need?



Fossil fuel consumers seem to buy all the available fuel as fast as the wells pump it and the refiners refine it - there IS NO radical fluctuation in any given period of time that matches other common futures market items - so why are oil futures traders needed?



Why are these middlemen in there, usually artificially increasing crude oil costs above the well price, raking in their profit on a commodity THEY never see or touch - at the expense of the final consumer? How does their existence benefit the oil companies OR the final consumer?



Since the refiners apparently are capable of processing all the crude oil they can obtain, why don't the oil companies eliminate the futures trader middlemen, and buy the crude oil DIRECT from the producers - foreign or domestic - at a lower, no middleman negotiated contract price that gives them the same profit margin - but delivers the final product at a lower price?



C'mon - explain it to me! :-laf:-laf

 

[tgordon]

Without the whole futures trading there is not a "fair" price. If there were no futures for oil how could you say that the oil I am buying at $200/barrel is over priced? In ag there is a lot of this fight going on as more people contract pork and beef with processors. The big debate from them is that the contract is for say $1. 25 above cash price. But if only 5% of the animals are going through the channels to decide the cash price and the processors already have capacity contracted for is the cash price "fair". I understand the frustration of the speculators, but at the same time I belive the futures market is needed to determine the price. Of course with ag commodities the price is much more of a rollercoaster and the speculators can do a good job of throwing money into the market also:-laf

 

[drury]

Businesses that depend on oil can use futures to insure that they have a supply at a price they can live with. For instance, I heard that Southwest Airlines was in a superior competitive position for over a year because they had laid in some futures contracts to guarantee their fuel prices. Nobody is forced to buy oil only on the futures market. I may be wrong, but I would venture to guess that more than half the oil is already bought and sold direct, so eliminating the supposed middleman wouldn't have much of an effect anyway.

 

[wtfd6]

I have often wondered this myself.

 

[Gary - K7GLD]

but I would venture to guess that more than half the oil is already bought and sold direct, so eliminating the supposed middleman wouldn't have much of an effect anyway.

But *IF* most of the big oil companies are buying direct from the oil producers at some sort of volume contract price, WHY do we see the radical daily price swings in crude oil and corresponding changes at the pump?



And WHY would we assume futures traders constantly bidding on the price of crude and consequently running the price up and down - usually UP, since THEY are in it for pure profit - as a "good" and desirable thing and better for the consumer in the long run than long term and stable price contracts directly between the oil refiners and the producers?



IF the oil futures traders AREN'T involved between the major oil companies and the producers, who DO they sell it to - and why such a large DAILY impact upon crude oil prices and pump prices if they really have little control and impact?



Obviously, I'm confused... :-laf:-laf



And I doubt that I'm alone...

 

[jmy]

There's more involved then fair trade price of commodities.

Most commodity futures trading is regulated by the Commodity Futures Trading Commission (CFTC). The CFTC provides oversight to prevent price manipulation and excessive speculation.

However the Commodity Futures Modernization Act of 2000 has a provision (loophole) which exempts most over-the-counter energy trades and trading on electronic energy commodity markets from oversite by the Commodity Futures Trading Commission.

The Commodity Futures Modernization Act of 2000 also allows the creations of new types of deritivies for commody trading. The loophole, drafted by an energy lobbyists group, exempts most energy related options trades from oversight by the Commodity Futures Trading Commission. As a result the door for over-leveraged (hedge fund type) investment in energy option related derivatives is open to manulapation and spectulation.

 

[drury]

But *IF* most of the big oil companies are buying direct from the oil producers at some sort of volume contract price, WHY do we see the radical daily price swings in crude oil and corresponding changes at the pump?

The daily price swings don't have much to do with futures. Daily prices are set in the spot market by supply and demand. The spot market is completely separate from the futures market. The only effect that futures have is the indirect effect of giving a window on the future which can create hysteria on the buying or selling side.

And WHY would we assume futures traders constantly bidding on the price of crude and consequently running the price up and down - usually UP, since THEY are in it for pure profit -

Commodities traders could care less which way the price goes. They just need to be able to predict it. They can make money on upswings (go long), downswings (go short), and dead flat (sell a put and a call). They don't have any inherent bias towards UP.

as a "good" and desirable thing and better for the consumer in the long run than long term and stable price contracts directly between the oil refiners and the producers?

Businesses aren't in it for the consumer. They are in it for profit. Get used to it, cause it ain't changing. If two businesses find it profitable to enter into a long term stable contract they will do so -- and I'm pretty sure this happens. If they find it makes more business sense to use the futures market, then they will do so. Keep in mind that a futures contract is nothing more than a long term and stable price contract, just as you are talking about. If you were to purchase a futures contract at price X and take delivery, you would pay price X, regardless of any intervening wild market fluctuations.

IF the oil futures traders AREN'T involved between the major oil companies and the producers, who DO they sell it to - and why such a large DAILY impact upon crude oil prices and pump prices if they really have little control and impact?

Traders sell to other traders. Keep in mind that what they buy and sell is the futures contract, not the actual oil. While the futures market has its legitimate uses as an insurance policy much of it is speculation. At any rate because of the technical nature of the market, I think that something over 90% of futures contracts expire worthless without anybody taking delivery of the actual commodity. Traders are mostly a very reactionary breed who rarely even dream of being able to influence prices. 99. 9% of their mental energy goes into trying to predict the next price swing.



Oil prices are volatile because the supply and demand is volatile, not because of the futures traders. Take a look at some of the other markets that are traded and you will see that the prices don't necessarily have volatile swings just because traders are involved. I haven't looked around lately to know what's stable and what isn't, but there was a while when corn and sugar were pretty darn flat and a . 02 cent move was big.



Another way to think of it is like gambling on a football game. The gamblers don't affect the outcome of the game unless there is severe corruption involved. There are so many players in the commodities markets that is much tougher to throw the "game" than it is in sports.

 

[CumminSense]

Great info, thanks to all esp. jmy and jdrury. One other tidbit:



As I understand it, crude oil and to a lesser extent refined oil products are a worldwide market (I think the stat is that now more than half of what we burn in our trucks comes from Arabia and Russia, less than 50% from Texas and Alaska). Thus, oil prices are sensitive to all sorts of worldwide conditions, including war, riot, hostage/plant occupations like Nigeria, weather, etc. , in addition to worldwide! supply and demand (why India and China are generally driving up the oil prices now).



Natural gas is largely a domesitc market (or at least North American, USA / Canada both produce a lot of NG, not sure about Mexico). I think this is mainly due to complexities of storing and transporting large quantities of nat gas over oceans, so it tends to stay at home. Thus, nat gas price I believe tends to track true supply and demand more closely, since we (thank God) have relatively few inside-the-borders wars, riots, pipelines bombed, etc. But compressed natural gas (CNG) may change this market over time, depending on how big CNG gets.



Y'all improve this info if I'm wrong, my knowledge on this is spotty.



-- Steve

 

[jmy]

Actually high volume trading of commodity futures in energy products has more to do with the actual price to the end user then ever before.

The Commodity Futures Modernization Act allowed creation of electronic energy commodity exchanges that are not be regulated by the Commodity Futures Trading Commission. The CFMA also allowed energy futures and derivatives to be traded on these exchanges. This has caused a surge in the demand for energy related contracts.
Since these exchanges operate globally the potential risk for manipulation by large investors anywhere around the world on a 7/24 basis is high.
The trading that occurs outside the Commodity Futures Trading Commission-regulated exchanges have no position limits on their contracts and no large trader reports are required or created.

Every commodities exchange in the USA limits how many futures and options contracts an investor may hold. This is done to prevent cornering the market as the Hunt brothers did with silver in 1980.

The absence of Commodity Futures Trading Commission limits on the electronic trading of these energy futures markets allow large hedge funds and large investors to acquire a much larger number of energy contracts than they could purchase on our conventional CFTC regulated exchanges.

What do you think happens when a happens to the price of oil/ diesel/gas, natural gas/etc. when a large investor, or group of investors, from a oil rich gulf nation buys a billion plus dollars worth of contracts on this unregulated electronic exchange?

Read the 2006 senate report for more info.
hsgac. senate.gov/_files/SenatePrint10965MarketSpecReportFINAL.pdf

 

[Gary - K7GLD]

Actually high volume trading of commodity futures in energy products has more to do with the actual price to the end user then ever before.

That is certainly my suspicion - and I haven't seen anything posted here yet that has changed my mind...



It seems ALL about big bucks and manipulation by those OUTSIDE the actual production and refining/distribution of the final product - guys making HUGE profits from "paper oil" they never see or touch - but GREATLY and artificially inflates well prices and pump prices to the consumer...



Until shown otherwise, I consider the oil/energy futures traders as simply another disruptive layer of profit-takers BETWEEN the oil producers and the final consumer - a DISruptive, DEstabilizing and inflationary source rather than a beneficial or stabilizing one...

 

[SHobbs]

I have said it before and will say it again. This is not supply and demand, it is pure greed plain and simple. Think about, when gas was $1. 35/gal big oil was making 30 million in profit now at $3. 00/gal they are making 40 billion in profit. I may be wrong been before but, something is definitely not right here. You have to admit though they have us right where they want us.

 

[cj hall]

Over The Barrel

Are you saying they have us bent over the barrel :-laf:-laf:-laf:-laf



If you are then dont you think it's time to try something different.



Trying to find out why they are making 40 billion is a waste of time,and sitting here and complaining about it is doing nothing to solve the problem. One more little thing say a war started by some country and we will see 100. 00 barrels of crude maybe even 120. 00 barrels then what? are you ready to pay 4. 00 to 5. 00 or more for a gallon of diesel?????



I will not pay that for fuel and I have not been for 2 years. How you ask? its all in this web site yes the one you are one right now!!!



come on people your parents paid good money ,teaching you how to read. Start, its fun ,you might learn something.



sorry I just had to say something.



cj hall

 

[Jim Smith]

I agree with shobbs, just too many folks in the process without adding any REAL VALUE. We need to dump them somehow.

 

[Gary - K7GLD]

I agree with shobbs, just too many folks in the process without adding any REAL VALUE. We need to dump them somehow.

EXACTLY!

 

[Gary - K7GLD]

Past threads on rising price of fuel and it's cost has always brought out lots of vocal "Capitalism at it's best" supporters - where have they all gone? :-laf



For those clinging to the denial-notion of oil futures commodity traders adverse effects (to the consumer!) on price of fossil fuels, READ THIS:



OPEC says pumping more won't bring oil price down - International Herald Tribune



A key quote:

Financial players "lost a lot of money on real estate, shares and bonds, and then they jumped to commodities," including oil, Attiyah said.

Next time you belly up to the pump and sacrifice your first-born for a tank of fuel, turn to face New York and the stock market, and bow in prayer to the sanctity of out-of-control, "ends justifies the means" Capitalism!

 

[msperos]

What boggles my mind is the fact that when ever a barrel of oil has increased you saw an immediate jump in fuel prices at the pump. In Denver my corner fuel stations have remained at $3. 05 for the last 6 weeks, even with Oil breaking $90. 00 a barrel. Have they decided that the last big jump from $2. 50 to $3. 00 is enough profit?

 

[Cattletrkr]

Trading futures in the grain market was started because processors didn't want the supply all at once and were willing to pay farmers to store their own grain. For all other commodities it's strictly a money making opportunity.

IIRC, 95% of all grain traded is on paper, meaning only 5% actually exists. If we really wanted to straighten the markets out, we'd eliminate the 95%. Same goes for oil.

 

[Gary - K7GLD]

MORE damning evidence of the adverse impact of Commodities oil futures traders on the out of controll upward spiral of energy costs:



Qatari minister suggests OPEC may discuss output increase+



The key sentence:

He said supply and demand have been meeting, blaming the price surges on short-term investors who have been pumping money into the market.

How LONG will we continue to allow this - how LONG can our economy survive it?

 

[Cattletrkr]

MORE damning evidence of the adverse impact of Commodities oil futures traders on the out of controll upward spiral of energy costs:

Qatari minister suggests OPEC may discuss output increase+

The key sentence:



How LONG will we continue to allow this - how LONG can our economy survive it?

I'm waiting for an answer too.

 

[Gary - K7GLD]

I'm waiting for an answer too.

Doncha just LOVE to hear the energy-cost apologists who frequently pop up to state "Current prices, adjusted for inflation, are ONLY about the same as in the big upsurge in the '80's"...



SURE, remember those? - the outages and long lines - THEN the big bill - jeeze, I'm sure HAPPY what we're seeing now is merely a return to THOSE happy days...



Pretty much like assuring us that the raping we're getting NOW is no worse than the raping we got before - so just assume the position, smile and ENJOY it...