Why oh why, etc.

The WaPo web site headline is "Few speculators drive vast oil trading market".  How about "influence" instead of "drive"?  The inside heading switches to the word "dominate" instead of either.  There is lots of talk about financial firms comprising a large share of the trading but never a consideration of the significance of the net position of those firms.


A simple explanation is always the lazy minds solution, for the simplest way to beleive something you need to understand. Most people realize that they need to understand what is happeneing to oil prices, and they dont have the time to invest in a complex but realistic perspective, and so they opt to believe the simplest solution they can understand. Viola!!! those pesky ****** are at it again...fill in speculators for this particular problem. Read Naomi Klien (at your own risk for gnashed teeth), who has mastered this technique.

Tyler, go post a comment to the article and point them to the right info!

occam's razor makes the cutting clean?

influence "the act or power of producing an effect without apparent exertion of force or direct exercise of command b: corrupt interference with authority for personal gain"

given the second part of the definition of influence as corrupt interference for personal gain are you sure that using influence rather than drive would be an improvement.

The net long/short position is irrelevant, what is relevant is how badly the longs want to be long and the shorts want to be short, and that is based on their expectations about how both the dollar and oil will behave in the future, as well as any surprises about how it is behaving in the present.

John S.: what changed? All of a sudden the price of oil is falling as fast as it rose..

What changed is that long-term inflation expectations for the dollar over the last month have decreased slightly, just as they have been increasing gradually over the last few years. A (currently dominant) component of oil, gold, and many other commodity prices is an exponential function of these inflation expectations. When dollar inflation expectations move slightly most dollar commodity prices move dramatically.

The variability of floating currencies is why since the dollar floated dollar commodity prices have been more volatile and have over longer periods tended to move together, which means over the last five years rising together. Commodity prices have risen broadly and dramatically up to this month not because commodity fundamentals have been miracously hit with a hundred different plagues, all of them just happening to drive up the price of a commodity. And they have fallen this month not due to a diety who has miraculously decided to stop and reverse all these plagues. The main cause, rather, lies in what these commodity prices share in common, namely the dollar.

Speculators have the best information about what kind of monetary behavior to expect, and thus about how much inflation to expect, but oil producers aren't completely ignorant of such things, so all the speculators do is make the inevitable price rise or fall occur more quickly. They have been (until the most recent month) the bearers of bad news, and we love to shoot the messengers, to treat the symptoms rather than doing the hard work of diagnosing and treating the disease.

Snarky-ness aside, why are there so many specs raking in so much in excess returns? Vitol rung up $100bn per annum in revs according to the Wapo-- 40% more than ConocoPhillips made in 2007...25% more than ChevronTexaco.

Why are so many specs (80% of contracts...?% on the ICE) allowed to prosper?

The regulators' and most commentators' definition of "speculator" is so broad as to be useless. It includes investment funds hedging their portfolios against inflation and middlemen as well as people who are just buying and selling because they know or think they know where the price will go.

To all those kvetching about the speculators, can you tell us specifically who you are complaining about and how you think their specific activities drove up prices? I have yet to hear a credible argument as to how they are damaging the commodities market. I'm inclined to agree with Nick that inflation expectations are the main cause of correlated commodity gyration. Speculators like Vitol are successful because they figured it out first.

This is not even the worst WaPo mistake today. As Tanta pointed out, they called Alt-A 'all-day'. And despite nearly every single comment on their own website pointing out the mistake, it's been there for about 24 hrs now.

Comments for this post are closed