& read this one. This is the kind of thing I was talking about here.

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These guys explain it better.

your MBA should have picked up on the lingo.

Jay, you gave us two examples of writers using “not a lot of sellers” in a figurative sense. We’ve finally come around to the agreement that this can’t be true in a literal sense.

So if you intended for this:

More futures contracts are bought, rather than sold.

and this:

I was referring to an investors own positions. Their purchases are going to outnumber their sales and that is the case at this point.

to be taken in a figurative sense, I’ve completely misunderstood you.

Nevertheless, you’re still suggesting that the market isn’t efficient enough to reflect all available information about the value of a commodity in the trading price.

In your view, anything that trades in the open market, be it commodities, securities etc. that happens to be overvalued due to speculation is the free market breaking down.

No and no. That’s not my view.

My view is that any market that has a sufficient number of participants distributes information efficiently. The price can’t be “overvalued” because of speculation or any other influence. Efficient markets incorporate all the available information into the trading price of the commodity.

The free market is broken only if commodities sell for artificially high or low prices. It’s my view that it never happens.

No, you’re the one that is confused. When you’re talking fundamentals in the marketplace, especially with commodities, the focus is on two things: supply and demand. Any commodities trader worth his income will tell you right now that the fundamentals for the price of oil doesn’t line up where it is at. When I was trading rubber, coffee and cocoa we had a guy who was obsessed with specs and fundamentals. He always hedged based on that gap. Oil should probably be trading at $40-$50 based on fundamentals.

When you claim that  speculation has forced the price higher than the actual value of the commodity, you re asserting that the free market mechanism of buying and selling is broken.

No, that is what you’re asserting. In your view, anything that trades in the open market, be it commodities, securities etc. that happens to be overvalued due to speculation is the free market breaking down. That’s your point of view, not mine. As for me, the speculators are part and parcel of the free market. Again, all I am doing is correcting people who think it is all supply and demand or those who think OPEC is controlling the prices.

No, what he means is, there are few who are willing to sell at the currently bid price!

No shit Sherlock. You made it seem as though I was saying people are buying, but nobody is selling. I said nothing of the sort and your MBA should have picked up on the lingo.

Whose suggesting anything failed?!?

You. When you wrote this:

Right now the cost of oil is all based on speculation. The people in the market know the fundamentals don t justify $72 a barrel.

When you claim that “speculation” has forced the price higher than the actual value of the commodity, you’re asserting that the free market mechanism of buying and selling is broken.

The thin gas supply is due to dwindling domestic reserves in the North Sea. New supplies will not come until 2007 at the earliest. As a result, forward wholesale gas prices have peaked this summer and analysts are predicting further rises. ‘The busiest time [for trading] is October. There are still a lot of customers yet to contract for winter because there are not a lot of sellers in the market,’ said Matthew Williamson at the Energy Information Centre consultancy.

And:

“It’s not tough to move the market. There are a lot of players out and there are just not a lot of sellers in here, so the market just has this natural tendency given the seasonality factors [to go higher],” said Paul Mendelsohn, chief investment strategist at Windham Financial Services.

The thin gas supply is due to dwindling domestic reserves in the North Sea. New supplies will not come until 2007 at the earliest. As a result, forward wholesale gas prices have peaked this summer and analysts are predicting further rises.  The busiest time [for trading] is October. There are still a lot of customers yet to contract for winter because there are not a lot of sellers in the market, said Matthew Williamson at the Energy Information Centre consultancy.

What exactly does Mr. Williamson mean when he says “there are not a lot of sellers”? That nobody has any gas to sell? That nobody is interested in selling gas? That they’re all keeping their gas?

No, what he means is, there are few who are willing to sell at the currently bid price! He accurately predicts the obvious solution: the prices bid by purchasers will continue to climb until a deal can be struck.

At that point, you’ll have a willing buyer and a willing seller of a commodity. “Speculation” will not have distorted the price by so much as a penny.

Not necessarily. Sometimes you have to liquidate a position because you have no choice.

How does that work? If there are more buyers than sellers, who are the buyers buying from? You can t buy unless there s someone else willing to sell at a price you ll pay.

Quaker, I really don’t have time to give you a crash course in the commodities market. The term “not a lot of sellers” or “not a lot of buyers” is common in the business. For instance, one commodity I used to trade was natural rubber. When the producers of said rubber were coming to us and asking what our interest in SIR20 was, we knew it was a buyers market (ie a lot of sellers in the market). When we had to chase them down, we knew it was a sellers market (not a lot of sellers in the market). Of course, there’s always going to be a buyer and a seller, but the fact is, you’ll often have MORE people buying (IE, in the market to buy) than selling (IE, not looking to sell). When that happens, prices go up. Understand now?

Jay, you re the one who s suggesting that the free market has failed when you suggest that  speculators have distorted the price of a consumable commodity.

Whose suggesting anything failed?!? How many times to I have to write it? I merely provided the REASON why prices have increased at this point. Cripes.

Quaker, I really don t have time to give you a crash course in the commodities market.

Don’t trouble yourself, Jay. I learned all I need to know when I got my MBA.

I go out and offer to buy a contract that gives me the right to buy oil at $150 a barrel six months from now. How many sellers do you think would be willing to sell me that contract? Answer: every last one of them, because I’m bidding up the price to more than double the current market.

Will other buyers go along with me and pay $150/bbl? Will all the other sellers hold out and wait for bids of $150/bbl? Probably not.

Why? Because if all of the sellers are willing to sell at $150, some will be willing to sell at $140, or $130, or $1 over the current market.
Very, very few (and I’m hedging here) of the buyers will think I’ve made a wise deal at twice the market rate. Unless they believe they’ll be able to sell their contracts for more than $150, they won’t pay that much.

When you start talking about “the fundamentals,” you’re confusing the market in consumable commodities with the market for equities. The “fundamentals” of a share in a company are based on the company’s ability to earn future profits. Oil doesn’t earn a stream of income, it just fluctuates in value. It’s “fundamental” value is whatever somebody will pay for it.

I was referring to an investors own positions. Their purchases are going to outnumber their sales and that is the case at this point.

You can’t get around the fact that every contract purchased is bought from somebody–a seller. Every single transaction involves both a buyer and a seller who strike a deal that they both believe is to their own advantage.

Let’s look at your “simple” example:

It s pretty simple. You go long right now on your April/June, and then you sell that at a nice profit to cover your July/Sep sales.

By “go long,” you mean you buy the rights to purchase oil at a fixed price in the future. From whom do you buy those rights? And when you sell at a nice profit (assuming your contract has risen in value), who do you sell to?

Right now, there are a lot of buyers, but not a lot of sellers.

How does that work? If there are more buyers than sellers, who are the buyers buying from? You can’t buy unless there’s someone else willing to sell at a price you’ll pay.

Nobody would say the free market was failing when oil was $18 a barrel, undervalued and some people were paying 88 cents a for a gallon of gas. Apparently it only  fails when prices go up.

Jay, you’re the one who’s suggesting that the free market has failed when you suggest that “speculators” have distorted the price of a consumable commodity. Free market theory says that can’t happen.

For every buyer, there is a seller. That s rule #1 of markets.

Quaker, I was referring to an investors own positions. Their purchases are going to outnumber their sales and that is the case at this point. It’s pretty simple. You go long right now on your April/June, and then you sell that at a nice profit to cover your July/Sep sales.

If you re genuinely a believer in free markets, then more participation even from those awful non-producing, non-consuming  speculators  creates market stability and efficient prices.

For some reason, you re making the case that those free market mechanisms have, at least temporarily, failed.

Quaker, you’re confusing the consumer market with the financial market. They don’t work the same way. Part of the reason (and sometimes like in this instance, a good part of the reason) why stocks and commodity prices increase or decrease is because of the buy and selling of others. Right now, there are a lot of buyers, but not a lot of sellers. Therefore, you get people bidding more for these contracts, thereby inflating the price. Often it happens in reverse. People cannot find buyers and therefore the price drops. This has nothing to do with the free market failing. Nobody would say the free market was failing when oil was $18 a barrel, undervalued and some people were paying 88 cents a for a gallon of gas. Apparently it only ‘fails’ when prices go up.

More futures contracts are bought, rather than sold.

Stop right there.

For every buyer, there is a seller. That’s rule #1 of markets.

For every “speculator” who buys the rights for a $70 barrel of oil six months from now, there’s a seller who’s willing to deliver that oil. If the bidding outruns “the fundamentals” as you would have it, the number of sellers willing to provide oil increases.

If you’re genuinely a believer in free markets, then more participation–even from those awful non-producing, non-consuming “speculators”–creates market stability and efficient prices.

For some reason, you’re making the case that those free market mechanisms have, at least temporarily, failed.

I wouldn’t call it ‘blame.’ All I’m doing is a) Correcting Oliver who seems to think OPEC has the power to move the prices the way they do, and b) make people realize that the prices as they are now are not because of the fundamentals (supply and demand). I’m merely pointing out a fact.

And what are you talking about with the free market moderating prices? In the commodities game, when noncommercial traders (the hedge fund and others that don’t actually produce or use oil) start buying up lots of futures contracts speculating that prices will go up higher (especially in the short term). More futures contracts are bought, rather than sold. As such, this works to drive up the price, especially if an oil company wants to sell a December contract and some fund manager goes and puts in a super high bid and then he turns it around and flips it to somebody else who thinks the recent transaction will lead to higher prices. And it continues.

There’s a lot of that action right now. Stuff like this does not last forever, but right now a lot of people still think there is an upside (the situation in Iran, the problems in Nigeria, etc) but it will sort itself out and some people will make a lot of money on the downside, but some people will lose big because they would have gotten in too late.

http://www.cbsnews.com/stories/2004/09/28/politics/main646142.shtml

Mr. Bush was critical of Al Gore in the 2000 campaign for being part of  the administration that’s been in charge while the  price of gasoline has gone steadily upward. In December 1999, in the first Republican primary debate, Mr. Bush said President Clinton  must jawbone OPEC members to lower prices.
As gas topped a record level of $50 a barrel this week, Mr. Bush has shown no propensity to personally pressure, or  jawbone, Mideast oil producers to increase output.
A spokesman for the president reportedly said in March that Mr. Bush will not personally lobby oil cartel leaders to change their minds.

Nobody was yipping about the free market when oil was $18 a barrel and gas was a buck a gallon.

But now that it’s $70 a barrel, you’re ready to blame “the speculators.” I thought open markets were supposed to moderate prices. Why have you turned against free market principles, Jay?

The racket is the auto industry is in bed with oil companies. You know higher ups own stocks in both companies. The only way it’s going to happen is via foreign competition, and that will be here soon enough. It’s going to be like the 80s all over again, when we got our collective ass handed to us due to Mr. Toyoda. And, of course, due to the crap leadership of the Big 3 in the late 70s and early 80s.

Bottom line: if we demand money be spent on this, it will be, so let’s start demanding it!

Nobody was yipping about the free market when oil was $18 a barrel and gas was a buck a gallon.