Wednesday, Jun 25, 2008
So which is it?
FT: Insight: Commodities rally driven by fundamentals, not speculators
Writer says blame the Fed's low interest rate policy, not the players on the indexes or futures markets.
Posted by icarus @ 04:57 PM (375 views) Add Comment
6 Comments
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1. drewster said...
It's fundamentals, not speculation. Last paragraph says it all:
"Unlike previous bubbles in other asset classes, such as tulip bulbs, dot-com stocks or houses, commodities are not being bought to be held in expectation of higher future prices. They are being consumed right now by commodity-hungry emerging markets."
"The only way speculators can artificially increase prices is by hoarding commodities in the expectation of higher future prices." But you can't hoard commodities!
If it helps you understand, consider this: you can trade Live Cattle futures on the Chicago Mercantile Exchange. But you can't possibly hoard actual live cattle - they'd need feeding, a farm to live on, and if you held them too long they would eventually die. The commodities market is different to the stockmarket or housing market. Commodities are bought once and consumed immediately; whereas shares and houses can be bought and resold over and over again.
2. harold said...
High commodities are a symptom - that's right, a symptom and not the cause - of dollar inflation. Sure there is speculation, but don't expect things necessarily to get a lot cheaper in the future.
3. Fingerbob69 said...
Drewster... every future contract for oil eventually is delivered.
The current commodity boom is principally driven by the Fed who on the one hand are busily devaluing the dollar by
a/ holding intrest rates below the rate of inflation - a negative rate
and
b/ auctioning vast quantities of cash to the investment banks who then use it to speculate on the commodity markets, so as to rebuild their liquidity which has been so cronically trashed by the subprime bubble/crash.
Now pumping all that dollar cash into the Us and world economy is what is responsible for the remergence of inflation ie commodity prices, food prices etc. Every month the Fed fails to raise rates means the misery will be prolonged for that much longer for the rest of us and until it does, every utterance from Big Ben regarding inflation is just so much hot air, the Wall St banks come first still.
4. drewster said...
Thanks Fingerbob69, that's essentially what I was trying to get at. Most people seem to think oil futures can be traded and speculated just like shares and houses - but they can't be, they're fundamentally different.
I agree the Fed is largely at fault; but oil is also up massively against the mighty €euro. Worldwide demand is increasing: for example Audi now sells more cars in China than in the US. The new Chinese middle-class wants cars and air-conditioned houses just like in America. Same goes for India, Thailand, Brazil, Eastern Europe, etc. As all of their economies grow, so their demand for oil will grow too. Relatively speaking, that means less oil available to us. Ten years from now, the roads in Britain will be a lot quieter than they are today.
5. Kruador said...
@drewster, Fingerbob69: oil futures *can* be traded infinitely, and not every futures contract is ultimately delivered.
A futures contract can be cashed in at the then-market rate the day after the contract expires:
"Delivery/settlement basis
ICE Brent Futures is a deliverable contract based on EFP delivery with an option to cash settle
against the published settlement price i.e. the ICE Futures Brent Index price for the day following the
last trading day of the futures contract. If the contract is to be subject to the cash settlement
procedure notice must be given (in accordance with LCH.Clearnet procedures) up to one hour after
cessation of trading."
Source: https://www.theice.com/publicdocs/IPE_Brent_Crude_futures_contract_specification.pdf.
The fact that no oil need ever be purchased allows speculators to accumulate positions. They can trade in the paper at the end of the period for cash, and recycle it back in to the start of the process by buying new contracts. In effect this is holding a position. The market moves because people who need to use the market to actually secure some oil, and new people wanting to buy into this bubble, represent a demand above the supply of wastepaper.
Michael Masters' testimony to the US senate on Index Speculation says:
"In the popular press the explanation given most often for rising oil prices is the
increased demand for oil from China. According to the DOE, annual Chinese demand
for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion
barrels, an increase of 920 million barrels. Over the same five-year period, Index
Speculatorsʼ demand for petroleum futures has increased by 848 million barrels. The
increase in demand from Index Speculators is almost equal to the increase in demand
from China!"
Source: http://hsgac.senate.gov/public/_files/052008Masters.pdf.
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