Thursday, January 8, 2009

60 Minutes' Story on Oil Speculation - updated Monday AM

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Here is a great example of the mainstream confusion between "speculation" and "manipulation." Throughout this 60 Minutes piece on oil price moves there are many times where Steve Kroft uses the word "speculation" to refer to nefarious and insidious dealings by unnamed parties. These traders (folks that used to work at Enron - if you listen to one of the interviewees) kept buying oil contracts and forcing the market higher. Mr. Kroft draws the conclusion that these purchases made the price go from $60 to $147 in a year. In my opinion, anyone can "speculate." It only requires some risk capital and a futures account. And it is not wrong or unethical or disproportionately populated by ex-Enron employees. Manipulation is much, much more difficult to pull off. More on that later.

Also interviewed is Michael Masters', a former hedge fund manager that gave some (now-infamous) Senate Testimony in May. This testimony made the rounds in our industry, and its thesis was that long-only hedge funds were buying up contracts of all types of commodities and that they were creating a situation where there were more buyers than sellers. In Mr. Masters' opinion, this imbalance was driving the price of crude and its associated products higher. Here is Michael Master's Testimony.

My very first post on this blog was on the CFTC's response to this testimony, refuting his hypothesis by going through the open interest records of the exchanges. The link to this post is HERE.

I have tried to articulate my opinion of how prices got so far out of kilter in my posts on this site. First, there was the fallacy of Internet corn. Second, there was a widespread adherence to the Hubbert's Curve theory. When you put those two things together, one is forced to reach a gnarly conclusion. That is....that sometime in the not too distance future we will be trading our last barrel of crude - and price is the only way to adjust for this impending certainty. This impending certainty would affect the way we all live...just like the quote from the greatest Bogart movie: "Maybe not today, and maybe not tomorrow, but soon and for the rest of your life."

After years of watching markets, I what a person would have to do to manipulate them. Market on close orders, sloppy fills that scare the pit....they all work - FOR A WHILE. But it is really hard to win in such a large market in anything other than the minute or hour in which you make your play. The market, when opinions are reasonably well-balanced, can adjust. And no one entity (Goldman, Merrill, or Paribas) is bigger than NYMEX Crude.

Only thoughts are bigger than that market. And the reason we all rode the price roller coaster of the last few years was because everyone drank the same linear, armageddon-preaching Kool-Aid.

Mr. Masters is wrong, and Mr. Kroft needs to learn the difference between "speculation" and "manipulation."

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