Originally posted by: Engineer
Supply issues on "OIL" has been pointed out: 8 year supply high worldwide and rising.
I'm not sure how risk doesn't equal speculation. You're speculating on risk or so it would seem.
Speculation implies profiting from risk. However, the futures markets largely exist to hedge *against* risk, not to take it. The largest amount of volume is hedge against risk, which is what the worldwide market does. Furthermore, for every person using the futures markets to accept risk, there is a counterparty using it to hedge risk.
An addition to risk of today is risk of tomorrow. Will oil always continue at it's current levels? Will geo-poltiical issues cause it to raise? Is it really as well supplied as thought? Or is it supplied to the maximum profit of oil producing countries, ala OPEC? What is a well supplied market? It is the amount that the market demands and obviously, the market demands more.
It is supply and demand, but not just for today, but also the future, which comes back to hedging.
This isn't like speculation on housing or GOOG. It isn't really always speculation for profit, but also speculation for loss of profit, the distinction is there and is usually lost on laymen.
However, people use speculators and hedge funds as the boogieman, blaming some morphous villain on their woes, when in actuality, it is their own demand of a limited supply and their future demand of a diminishing supply that is causing the issue.
An additional point. While supply may be keeping pace, it is keeping pace at an increased cost. People use the term "peak oil". However, peak oil is a fools explaination for the market. For every "peak" there will be a matching find that just costs an additional marginal amount, further keeping pace with current supply. However, at what cost? If supply doesn't match the increase in demand, then the natural response is a further increase in price.
When that happens you can use more expensive extraction methods to expand production, some examples are oil sands and oil shale, which will eventually be profitable. However, if they cannot provide enough to match the increase in demand, then the price will not return to an equalibrium.
Finally, the recent find in increasing reserves did drop prices. This could be because demand has decreased or that supply has increased.
The world has to get used to the fact that the easy, cheap, oil is gone. It's a matter now of how quickly supply with ramp with demand given India, China, supply disruptions, and overall geo-political risk. All of these get built into the price of a commodity such as oil.
Hedging doesn't always provide price feedback. Even if it did, the markets, in their most efficient state (as commodity markets are *the* most efficient market) will often punish those who take speculative positions since they are truly a random walk that rely much less on non-public material information and much more on the general market of millions of purchasers of both future and underlying products that often have the same information.
Some can say that markets can be efficient but irrational. That can be the case for many markets (housing, GOOG, .bombs). However, those markets are often filled with the irrational expectation of continual *GOOD* results. People are betting the good times will always roll.
However, betting bad times will keep going is a fools bet, one which people are loathe to make and is much more unpredictable in nature.
Always keep in mind that speculation in the commodity markets is *MUCH* different than equity. Futures are used and less educated people are eliminated from the mix. Furthermore, for every short every (seller or writer) there has to be a long (buyer) willing to take your contract. Some may say that this is the same as a buyer/seller in equity, but there are many fundamental differences, the largest is that speculation in futures requires that contract, which is ongoing and that profit/loss is always realized by marking to market and final resolution in the spot markets.
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