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The Price Of Oil

January 11, 2009 4:00 PM

The historic swings in oil prices last year were the result of financial speculation from Wall Street and not supply and demand. Steve Kroft investigates.

Did Speculation Fuel Oil Price Swings?
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by JBden April 11, 2011 2:10 PM EDT
Wow, gas prices are through the roof again? Surprisingly supply has had no interruptions (the tiny loss of Libyan production has been totally made up by OPEC production increases) and demand is even down a bit due to Japan. So once again, supply and demand are not the problem. Its wall street gouging the American Consumer AGAIN.

Strangely, I noticed quite a few posts by people that don't seem to understand the commodities markets.

First, investors buy future contracts for delivery of a barrel of oil at some date in the future at a locked in price - say $100 a barrel. Let's say the delivery date is 90 days. Any time from the moment they purchase the contract, to the expiration date the can sell this contract to someone else, usually for a profit. So let's say Morgan Stanley writes a paper saying they believe the price will be $120.00 in the next 90 days, their legions of salesmen take that paper and encourage investment in the "opportunity" (just like a stock in the old days). This surge of investment - all by itself - drives the price up. Then when it suits Morgan Stanley they write a new article/paper (usually they will tie this to a news event to add credibility), stating that it's time to get out of oil. The smart money starts buying "short sale" contracts for say $110 (which are almost free since the price is at 115 - for those of you that are wall street challenged, who wants to sell a barrel at $110 each when the current price is $115?) Now they are making money on the way down. However, this scheme can only work if their influx of investment swamps the market and overpowers traditional supply and demand. By all accounts, the amount of money and number of "speculative" trades is in fact overpowering actual users of oil. The smart money gets out early at say 115 per barrel while the losers on wall street are the last bunch of investors that hold contracts that are going to expire in say 30 days for 120 a barrel with the price now at $110. But even these guys are usually smart enough to buy a "short sale" contract at say $108 for $12 dollars a barrel to hedge their losses (that way they only lost $12 per barrel instead of the full $120).

It's a great game and I wouldn't really care about it except that a casualty in the process is gas pump prices - and in fact, the people that get hurt the most can least afford to pay for wall street's game: The working poor. How long will we let these unscrupulous salesmen steal from the American people. STOP wALL sTREET NOW. The commodities market needs complete re-regulation and serious oversight. We need to know who is holding future contract positions AND who is holding short sale positions and when they were purchased. Obama should take note that during the last run-up in gas prices it nearly killed the economy all by itself.
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by rostrada May 3, 2010 9:31 AM EDT
Check out a "must see" You Tube Lecture by Dr. Albert A Bartlett. "Arithmetic,Population and Energy" series..it is pretty amazing!
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by Mikery1985 July 16, 2009 12:01 PM EDT
OK. So much has been said about speculators manipulating or not manipulating the markets that I see some trends. The folks that would want to take advantage of others manipulations argue that there is nothing wrong here and it is all a political ploy--so that they can attempt to capitalize--kind of greedy isn't it? Those folks would argue that they should gain from an obscene situation that effects the whole society. But anyone that wants to argue for regulation or oversight is soundly beaten or accused of ignorance of the real issues (enter "acreditor"). The 60 Minutes piece was not meant as a educational primer on markets. It was intended to give us documented evidence that some people that have/or hopefully had the ability to control the oil markets in their favor. And to "i_did_not_vote_for_obama" it is now July and no big spike in oil proces has happened. I think you missed that one. The EIA (to which I have been paying attention for over ten years) has data and reports galore to indicate the case made by the 60 Minutes piece is correct. I don't believe that the data that they provide monthly is politically motivated. If anyone cares to look it up it is available at: http://tonto.eia.doe.gov

Now, the demand is the same this year as last, that supply is days ahead of last year and still the price went up for the summer adjustment. It wasn't as high as last year but still it went up. How can anyone with a brain and any critical thinking skills ask us to believe that the free market is at work here? Supply/demand is not driving the price adjustments. The refineries are only operating at 85-89% capacity and still the supply is increasing. The demand is basically flat. So if the free market principals are in control, the price should trend down until a balance point is reached, which hasn't happened yet. The price should still be dropping. But it isn't. So, more than meets the eye or more than what we expect is going on.

To expect that any less control or regulations will be enacted is ludicrious. We need to put the same kind of controls in place to regulate the important commodities that affect our economy as the stock market has. Automatic "stop-points" when wild swings occur. This should serve to smooth out any big spikes like when short sellers have to cover their a@@'s.
Thank you.
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by I_did_not_vote_for_obama March 3, 2009 4:33 PM EST
This is Great!
Our country, including the left winged CBS emphatically blamed George W Bush and Dick Chaney. Since they are not in this report of the commodities market, should you not publically apologize? An make note: the new administration will send oil prices through the roof?.very very soon. Please report on that one too. Thank you for the opportunity, I will notify Shawn Hannity as well.
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by aceditor January 14, 2009 10:08 PM EST
4) Speculators can''t drive the price up and hold it up if supply/demand isn''t tight. An artificially high price will swamp the markets with product and quickly! When the Hunts tried to corner the silver market the market was swamped with silver coming out of safe deposit boxes. It took economic collapse to tip the balance to lower oil prices.
5) production, unlike the claims of the piece, did indeed fall. In fact, as price rose during 2007, both U.S., Persian gulf and worldwide oil production was below 2006 levels. As the super spike began in 2008, the Persian Gulf region increased production roughly 10% to capture the high prices. What is alarming is that U.S. production again fell (could not capture high prices) and worldwide production gained only 6%. despite what the 60 Minutes piece said, world demand for oil waned only slightly during the spike period and production was only then ramping up. Let''s not forget, in Q2 2007 demand fell only to accelerate again to record highs 6 months later.
6)"How could the 60 Minutes crew have missed all of these things?"

Because they are part of the elites. Elites believe that anytime the price for oil goes up it is because of "greedy'' speculators. Curious that the recent collapse in oil prices does not seem to be have been caused by greedy speculators who are shorting oil.
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by aceditor January 14, 2009 10:07 PM EST
This actually was at terrible piece of journalism. Here are the comments from financial site Seeking Alpha which explain why:
1) No one has ever been able to explain how speculators can influence spot prices without taking delivery. The reason is that they can''t. It''s an absurd assertion.
2) References to the volume of futures trades as "evidence" that speculation is driving prices is equally stupid. For every buyer there is a seller. The volume of sells increased at the same rate as the volume of buys.
3)The $25 dollar rise in oil on Sept. 22nd was horrendous journalism, and it is obvious they have no clue what caused it. I was watching the spot and 2 forward month contracts when that happened. Within 30 seconds, the reason for that rise was quite obvious. The current contract was due to expire that afternoon. Shorts were forced to cover. There was little volume because the real trading was occurring in the next forward month. So a short squeeze occurred. The next day, the oil contract switched months, and the price was back where it was.
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by ugalri January 14, 2009 7:59 PM EST
Your viewers might like to see a segment on the current disparity between rbob (wholesale gasoline futures) and the price at the pump. The difference currently is often near or above 100%. Historically it has been below below 25%.
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by chrisrising January 14, 2009 5:22 PM EST
Very interesting!! I think however that if we each had the money and energy to invest in oil we would. Everyone wants to be financially secure..it doesn''t matter who you are or how much you have. I''ve invested in real estate and have seen awesome returns..others invest in small business they start..Either way.. I think there is a correct way to do it.. "The Pizza Delivery Millionaire" by Rick Vazquez is a great book and tool to start paving the way for your future and I encourage anyone who is hesitant to start your own business to take a leap of faith! Invest in yourself first.
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by jporcelli2 January 14, 2009 3:53 PM EST
Yes, speculators were in the market, and had to sell off to meet margin calls from their clients, but it still doesn''t remove the issue of falling production rates in almost all the major oil producing countries. You should do a story on Mexico''s Canterell field and how that will impact both the US and Mexico''s economies. Don''t let market signals fool you.
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by lawalker101 January 14, 2009 3:43 PM EST
Well, it is about time that someone wrote about this! I have been waiting for over a year for an explanation. Thank you 60 minutes! I look forward to updates as to what will be done about this. Please stay on top of it for the public''s sake! This is the good side of journalism.
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