Tuesday, November 1, 2011

Wow, Wow, Wow -- So Much for that "Speculator" Crazy Talk

Link here.
Market fundamentals explain the tripling of oil prices between the beginning of 2007 and middle of 2008, according to two Federal Reserve Bank of Dallas reports on suspicions about the role of speculation. [Let's see, this is past the middle of 2011, so this report took more than three years to complete.]

The reports, by Michael D. Plante, research economist, and Mine K. Yucel, senior economist and vice-president, say a surge in the price of crude oil to a peak exceeding $145/bbl in July 2008 occurred in well-functioning futures and physical markets.

Because the increase coincided with increases in futures-market trading and activity by noncommercial traders, questions linger whether speculators pushed prices beyond levels justified by physical supply and demand. Amplifying concern is growth in activity by noncommercial traders, or speculators, from 10-15% of unsettled oil futures contracts on the New York Mercantile Exchange in 2000 to about 40% now. During that period, total trading in oil futures contracts has about tripled.

Despite the coincidence, oil futures prices didn’t conflict with theory about how they should have responded to physical market changes, according to one of the reports.

“During normal times, the futures price should be higher than the spot price—with the premium roughly equaling the cost of storage and lost interest income—and inventories should be abundant,” Plante and Yucel say. “In certain situations, such as when demand is temporarily high or supply temporarily low, the spot price will be higher than the futures price, and inventories will be relatively low.”
I don't know if the report provided a definition "to speculate" or explained what a speculator what. Definition of speculator: one who speculates

Definition of "to speculate": To engage in the buying or selling of a commodity with an element of risk on the chance of profit. And there's something wrong with that?

I can't make this stuff up. 

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