Wednesday, September 14, 2011

"Speculators"

I'm still flummoxed by pundits who are confused with the definition of "to speculate" after seeing the list of companies bidding for oil from the US Strategic Petroleum Reserve and how much they are willing to pay for it.

After the announcement that oil would be released from strategic petroleum reserves around the world, there were pundits who expected the price of oil to fall (and it did for the next 24 hours or so). When the price of oil stabilized and then rose again, going above the price before the announcement, there were pundits who said that it was speculators driving the price back up.

But looking at the list, these were all refiners (or oil companies with refineries) looking for SPR oil.

With three exceptions: Barclays, JPMorgan, and Trafigura.

With those exceptions, I just don't include refiners buying oil from the SPR as speculators. If one does, then one must agree that anyone trading in oil are "speculators."

As for me, I don't use the word "speculator" to describe folks buying and selling commodities. In fact, I'm not even sure when I would use the word "speculator" -- it's all in the eye of the beholder.

Here are the generally accepted definitions of "to speculate":
  • to engage in thought or reflection; meditate (often followed by on, upon,  or a clause);  
  • to indulge in conjectural thought; and,
  • to engage in any business transaction involving considerable risk or the chance of large gains, especially to buy and sell commodities, stocks, etc., in the expectation of a quick or very large profit.
I just don't see bidding for oil at $107 when it was trading on the open market for $97 as "considerable risk" or even the chance of large gains. I just don't see oil spiking to $107 before these refiners take delivery of the oil they are bidding on. In fact, one could argue, based on the pundits who say there is no shortfall, that they are taking a huge risk on the downside.

So, I am flummoxed, again, by the pundits who are confused with the definition of "to speculate" when it comes to oil.

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