"In Defense of Oil 'Speculators'"

[Chadder007]

If anything its truely the speculators that have caused this BS.

Oil usage is down....the Saudi's have agreed to pump more oil. Iraq has opened up 6 areas for U.S. companies to pull oil. Why is the price still up?....Future Traders/speculators going up on the price every time an oil Barron stubs their toe.

 

[CycloWizard]

Originally posted by: sao123
Unless you are an oil refinery(or some other petrolium industry) all you want is the slip of paper that you can sell again later... the increased demand for oil is virtual (fake), because the demand for delivery at the oil buyer is UNCHANGED. The refinery has not increased its capacity, and still takes the same amount of delivery, but people wanting to buy oil futures has increased.

A buys 100 barrels for $100 a barrel. Sells them to B when the price got to $110. B sells them to C when the price reached $120 a barrel. C sells them to an actual oil buyer at $130 a barrel. 3 people have make profits off of oil which until now had not been delivered. and DUH it cost more than it C had just bought it directly.
Now when groups D,E, & F see those profits, demand for buying oil futures goes up.
Price goes up with demand, and the cycle repeats.

Th easy way to combat this is to require everyone who buys an oil future to take delivery.

At the end of the day, no one is holding a gun to C's head to make him pay $130 for it. If he can get it cheaper elsewhere, then he would do so. He is even free to send someone to the futures marketplace to buy directly, just like A and B did. In the end, the market is going to do what it will.

 

[ElFenix]

Originally posted by: LegendKiller
It's all perception.

that is very true.

 

[skace]

I guess my question would be, can't they just capture the fucking data and do a simple analysis? Oil was x, future traders pushed it to y, sold final product as z, largest delta occured between such and such. Is the information actually protected in some manner such that, instead of doing guess work, real data could be analyzed?

 

[Special K]

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

It seems that the price of oil should dictate the price of oil futures, yet now it seems the opposite is occurring. Traders bid up the price of oil futures, so the price of oil goes up as a result? That just doesn't make sense to me, unless you need an oil futures contract in order to buy an actual barrel of oil. It seems like the price of oil itself would be dictated by fundamentals, and the price of the futures contracts would be dictated by whatever people think oil prices will do in the future. The traders could bid up the price of a future barrel of oil to $500 if they wanted to, but if the fundamentals say that oil should be priced at $65/barrel, then the value of that futures contract should quickly deflate as it comes due and people realize they can purchase oil for $65/barrel. Instead, what seems to be occurring is that the price of the futures contract is bid up, and then the price of the actual oil automatically follows. Why? Again, it seems as though the cause/effect relationship between oil futures contracts and actual oil is reversed.

The only thing I can figure is the cause/effect relationship between actual barrels of oil and oil futures contracts must be extremely complex if the analysts are taking polar opposite positions on the role of speculators in the current price run up.

 

[LegendKiller]

Originally posted by: skace
I guess my question would be, can't they just capture the fucking data and do a simple analysis? Oil was x, future traders pushed it to y, sold final product as z, largest delta occured between such and such. Is the information actually protected in some manner such that, instead of doing guess work, real data could be analyzed?

It's not that easy. First off, because of the London Loop, reporting requirements have been significantly diminished. Second, you can't just simply estimate the impact, since it'd require a before and after amount. Anything at this point is speculation about speculation.

 

[maddogchen]

Originally posted by: Special K

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

my guess is this:

Little Tom wants to buy the new Mario Kart Super Duper 9 for the Nintendo Wii. He has two options, he can pre-order now or he can wait till it comes out. He waits till it comes out. He goes to Best Buy, they say sorry we only received 100 copies and they were all snatched up in the pre-order process. Little Tom is sad and without a game to play. Now imagine if there is news everyday that hey, best buy will get a new stock of games next week, you can pre-order now. Will you pre-order or will you wait till that day and hope you can get a copy?

 

[Special K]

Originally posted by: maddogchen

Originally posted by: Special K

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

my guess is this:

Little Tom wants to buy the new Mario Kart Super Duper 9 for the Nintendo Wii. He has two options, he can pre-order now or he can wait till it comes out. He waits till it comes out. He goes to Best Buy, they say sorry we only received 100 copies and they were all snatched up in the pre-order process. Little Tom is sad and without a game to play. Now imagine if there is news everyday that hey, best buy will get a new stock of games next week, you can pre-order now. Will you pre-order or will you wait till that day and hope you can get a copy?

Right, except the speculators never take physical delivery of the oil. They just buy the rights to the pre-order sale (i.e., the futures contract) and then sell it right before it comes due. This raises another question - does someone eventually have to honor the obligation of the futures contract and buy a physical barrel of oil, or is there a way out of that?

 

[maddogchen]

Originally posted by: Special K

Originally posted by: maddogchen

Originally posted by: Special K

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

my guess is this:

Little Tom wants to buy the new Mario Kart Super Duper 9 for the Nintendo Wii. He has two options, he can pre-order now or he can wait till it comes out. He waits till it comes out. He goes to Best Buy, they say sorry we only received 100 copies and they were all snatched up in the pre-order process. Little Tom is sad and without a game to play. Now imagine if there is news everyday that hey, best buy will get a new stock of games next week, you can pre-order now. Will you pre-order or will you wait till that day and hope you can get a copy?

Right, except the speculators never take physical delivery of the oil. They just buy the rights to the pre-order sale (i.e., the futures contract) and then sell it right before it comes due. This raises another question - does someone eventually have to honor the obligation of the futures contract and buy a physical barrel of oil, or is there a way out of that?

what do you mean by honor the obligation of the futures contract? your question doesnt make sense to me.

you paid for the barrel of oil, that barrel is yours when that day comes. If you don't pick it up thats your problem, or maybe they charge you for storage. I wouldn't know.

 

[LegendKiller]

Originally posted by: Special K

Originally posted by: maddogchen

Originally posted by: Special K

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

my guess is this:

Little Tom wants to buy the new Mario Kart Super Duper 9 for the Nintendo Wii. He has two options, he can pre-order now or he can wait till it comes out. He waits till it comes out. He goes to Best Buy, they say sorry we only received 100 copies and they were all snatched up in the pre-order process. Little Tom is sad and without a game to play. Now imagine if there is news everyday that hey, best buy will get a new stock of games next week, you can pre-order now. Will you pre-order or will you wait till that day and hope you can get a copy?

Right, except the speculators never take physical delivery of the oil. They just buy the rights to the pre-order sale (i.e., the futures contract) and then sell it right before it comes due. This raises another question - does someone eventually have to honor the obligation of the futures contract and buy a physical barrel of oil, or is there a way out of that?

Technically, you buy the obligation to purchase the oil. This isn't like an options contract whereby you have the right, but not the obligation, to purchase. Futures contracts are exactly that, a contract, to purchase X barrels of oil on Y date for Z dollars.

Of course, if the contracts aren't "offset" through an opposite position they can also be settled in a "netting" process, by which the person on the losing side of the contract pays the winner the difference between the current spot price and the future's contract price.

For example, if I was the "winner" and the spot price was $150 and the futures price was $100, I could technically force the "loser" to sell me the physical barrel of oil for $100. Or, we could simply give each other the respective amounts of money (him 150 to me, me $100 to him). Instead, he just gives me $50.

If I actually need the oil, I use his $50, $100 of my own money, and I have the $150 spot price, of which I only paid my contracted $100 for.

This is where speculation comes in. Since I can "net" out of the position, I don't need to take physical deliver. I could also take an offsetting "short" contract to counter my "long" one at the end, which would result in the same situation.

Keep in mind that I've only put down 5% of margin (and made the appropriate adjustments in margin for market price fluctuations). Thus, any money I make has a leverage of 20:1.

What's funny is that banks are leveraged 20:1 in many cases, thus, they have 400:1 leverage. That can be a pretty huge ROE.

 

[LegendKiller]

Originally posted by: maddogchen

Originally posted by: Special K

Originally posted by: maddogchen

Originally posted by: Special K

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

my guess is this:

Little Tom wants to buy the new Mario Kart Super Duper 9 for the Nintendo Wii. He has two options, he can pre-order now or he can wait till it comes out. He waits till it comes out. He goes to Best Buy, they say sorry we only received 100 copies and they were all snatched up in the pre-order process. Little Tom is sad and without a game to play. Now imagine if there is news everyday that hey, best buy will get a new stock of games next week, you can pre-order now. Will you pre-order or will you wait till that day and hope you can get a copy?

Right, except the speculators never take physical delivery of the oil. They just buy the rights to the pre-order sale (i.e., the futures contract) and then sell it right before it comes due. This raises another question - does someone eventually have to honor the obligation of the futures contract and buy a physical barrel of oil, or is there a way out of that?

what do you mean by honor the obligation of the futures contract? your question doesnt make sense to me.

you paid for the barrel of oil, that barrel is yours when that day comes. If you don't pick it up thats your problem, or maybe they charge you for storage. I wouldn't know.

You never paid for the barrel of oil. You paid a marginal cost for the actual futures contract (small cost) and you paid in a margin requirement of 5%. You might have 10% of the total purchase price "paid" into the oil contract, but no more.

If you don't pay you're in default of the contract. I don't think (but I could be wrong) that there is automatic bank account settlement, but technically it wouldn't even matter if there were since you could just drain the account.

 

[Special K]

Originally posted by: LegendKiller

Originally posted by: Special K

Originally posted by: maddogchen

Originally posted by: Special K

Originally posted by: maddogchen

So this is my understanding of this. For example there are 100 barrels to buy. I am an oil speculator. I bid on a future contract to deliver 25 barrels to me in 2 months. I bid 150 per barrel. I outbid everyone else. I hold onto that future's contract. 3 other oil speculators have one the other bids at 25 barrels each. No refinery won a bid. Approaching two months later, the refineries still do not have oil coming in that day. I offer to sell them my future contract for that day at 160 a barrel, they accept. Is this simplified example of oil futures correct?

But you don't need to buy a futures contract in order to buy an actual barrel of oil though, right? Can't the refinery just buy the oil directly, instead of going through the futures market? That is what I don't understand. The speculators are bidding up the price of futures contracts right now that don't come due until August.

my guess is this:

Little Tom wants to buy the new Mario Kart Super Duper 9 for the Nintendo Wii. He has two options, he can pre-order now or he can wait till it comes out. He waits till it comes out. He goes to Best Buy, they say sorry we only received 100 copies and they were all snatched up in the pre-order process. Little Tom is sad and without a game to play. Now imagine if there is news everyday that hey, best buy will get a new stock of games next week, you can pre-order now. Will you pre-order or will you wait till that day and hope you can get a copy?

Right, except the speculators never take physical delivery of the oil. They just buy the rights to the pre-order sale (i.e., the futures contract) and then sell it right before it comes due. This raises another question - does someone eventually have to honor the obligation of the futures contract and buy a physical barrel of oil, or is there a way out of that?

Technically, you buy the obligation to purchase the oil. This isn't like an options contract whereby you have the right, but not the obligation, to purchase. Futures contracts are exactly that, a contract, to purchase X barrels of oil on Y date for Z dollars.

Of course, if the contracts aren't "offset" through an opposite position they can also be settled in a "netting" process, by which the person on the losing side of the contract pays the winner the difference between the current spot price and the future's contract price.

For example, if I was the "winner" and the spot price was $150 and the futures price was $100, I could technically force the "loser" to sell me the physical barrel of oil for $100. Or, we could simply give each other the respective amounts of money (him 150 to me, me $100 to him). Instead, he just gives me $50.

If I actually need the oil, I use his $50, $100 of my own money, and I have the $150 spot price, of which I only paid my contracted $100 for.

This is where speculation comes in. Since I can "net" out of the position, I don't need to take physical deliver. I could also take an offsetting "short" contract to counter my "long" one at the end, which would result in the same situation.

Keep in mind that I've only put down 5% of margin (and made the appropriate adjustments in margin for market price fluctuations). Thus, any money I make has a leverage of 20:1.

What's funny is that banks are leveraged 20:1 in many cases, thus, they have 400:1 leverage. That can be a pretty huge ROE.

Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

 

[LegendKiller]

Originally posted by: Special K
Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

yes, you can buy the oil on the "spot" market. However, when you're running a business, such as a refinery, you need to reduce your risk to the spot market, especially when it can be volitile. You're in the business of running a stable refinery and making money off of refining, not being beholden to a wild and wooly energy market. Thus, you reduce risk through futures.

It's no different than airlines. Southwest has made a killing off of hedging against fuel increases.

It's all about risk reduction.

I deal with the same thing every day, except for it's interest rate swaps and/or currency swaps. The stuff can get pretty complicated, but it's all used in the name of risk reduction.

 

[Special K]

Originally posted by: LegendKiller

Originally posted by: Special K
Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

yes, you can buy the oil on the "spot" market. However, when you're running a business, such as a refinery, you need to reduce your risk to the spot market, especially when it can be volitile. You're in the business of running a stable refinery and making money off of refining, not being beholden to a wild and wooly energy market. Thus, you reduce risk through futures.

It's no different than airlines. Southwest has made a killing off of hedging against fuel increases.

It's all about risk reduction.

I deal with the same thing every day, except for it's interest rate swaps and/or currency swaps. The stuff can get pretty complicated, but it's all used in the name of risk reduction.

But why is the spot price rising in response to the futures price? Isn't the futures price just a bet based on what people think the spot price will be in the future, with the spot price being based on fundamentals? Why does the spot price go where the speculators bet it will go?

It's like the speculators are saying "The spot price of oil will rise to $X by August", and so it does. It's like a self-fulfilling prophecy. How is this possible?

 

[LegendKiller]

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Special K
Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

yes, you can buy the oil on the "spot" market. However, when you're running a business, such as a refinery, you need to reduce your risk to the spot market, especially when it can be volitile. You're in the business of running a stable refinery and making money off of refining, not being beholden to a wild and wooly energy market. Thus, you reduce risk through futures.

It's no different than airlines. Southwest has made a killing off of hedging against fuel increases.

It's all about risk reduction.

I deal with the same thing every day, except for it's interest rate swaps and/or currency swaps. The stuff can get pretty complicated, but it's all used in the name of risk reduction.

But why is the spot price rising in response to the futures price? Isn't the futures price just a bet based on what people think the spot price will be in the future, with the spot price being based on fundamentals? Why does the spot price go where the speculators bet it will go?

It's like the speculators are saying "The spot price of oil will rise to $X by August", and so it does. It's like a self-fulfilling prophecy. How is this possible?

I think there's a couple things going on.

1. It is a self-fulfilling prophecy.

2. People who are saying oil will reach $$XXX are the same ones that are buying up the futures.

 

[ElFenix]

Originally posted by: LegendKiller

I think there's a couple things going on.

1. It is a self-fulfilling prophecy.

2. People who are saying oil will reach $$XXX are the same ones that are buying up the futures.

yup. what happens when a big IB analyst says 'we expect oil to be at $150 a barrel by the end of july'? it jumps that very day. meanwhile, the other side of the IB has taken various positions and makes a killing (speculation on my part, but i don't think it's unreasonable). as short term demand for oil and its derivatives is very inelastic, the IBs can just keep doing this over and over and over.


how is it possible? there isn't enough oil not tied into futures contracts to drive down the price of oil tied to futures contracts. and the oil not tied into a futures contract is only going to sell for a penny less a barrel. all of it is going to sell, and then it's just the futures contract oil. and at the moment, pretty much all of that is selling as the asking price, too.

 

[Special K]

Originally posted by: LegendKiller

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Special K
Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

yes, you can buy the oil on the "spot" market. However, when you're running a business, such as a refinery, you need to reduce your risk to the spot market, especially when it can be volitile. You're in the business of running a stable refinery and making money off of refining, not being beholden to a wild and wooly energy market. Thus, you reduce risk through futures.

It's no different than airlines. Southwest has made a killing off of hedging against fuel increases.

It's all about risk reduction.

I deal with the same thing every day, except for it's interest rate swaps and/or currency swaps. The stuff can get pretty complicated, but it's all used in the name of risk reduction.

But why is the spot price rising in response to the futures price? Isn't the futures price just a bet based on what people think the spot price will be in the future, with the spot price being based on fundamentals? Why does the spot price go where the speculators bet it will go?

It's like the speculators are saying "The spot price of oil will rise to $X by August", and so it does. It's like a self-fulfilling prophecy. How is this possible?

I think there's a couple things going on.

1. It is a self-fulfilling prophecy.

2. People who are saying oil will reach $$XXX are the same ones that are buying up the futures.

Doesn't OPEC ultimately set the spot price of a barrel of oil? If so, does that mean they are buying into all the analyst's prophecies as well and are just raising the spot price along with the price of a futures contract, which is determined by the market?

 

[sniperruff]

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Special K
Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

yes, you can buy the oil on the "spot" market. However, when you're running a business, such as a refinery, you need to reduce your risk to the spot market, especially when it can be volitile. You're in the business of running a stable refinery and making money off of refining, not being beholden to a wild and wooly energy market. Thus, you reduce risk through futures.

It's no different than airlines. Southwest has made a killing off of hedging against fuel increases.

It's all about risk reduction.

I deal with the same thing every day, except for it's interest rate swaps and/or currency swaps. The stuff can get pretty complicated, but it's all used in the name of risk reduction.

But why is the spot price rising in response to the futures price? Isn't the futures price just a bet based on what people think the spot price will be in the future, with the spot price being based on fundamentals? Why does the spot price go where the speculators bet it will go?

It's like the speculators are saying "The spot price of oil will rise to $X by August", and so it does. It's like a self-fulfilling prophecy. How is this possible?

I think there's a couple things going on.

1. It is a self-fulfilling prophecy.

2. People who are saying oil will reach $$XXX are the same ones that are buying up the futures.

Doesn't OPEC ultimately set the spot price of a barrel of oil? If so, does that mean they are buying into all the analyst's prophecies as well and are just raising the spot price along with the price of a futures contract, which is determined by the market?

a large number of oil future contracts at a premium (such as the $300/barrel expiring at the end of 2008) pushes the current price up. lets say if you see a large number of people are willing to buy a 3G iPhone for $1000 each, you'll probably grab a bunch even when you can buy them at $700 each, even if the price is already deeply inflated.

the original idea of the futures market is to provide insurnace against price fluctuation.

 

[ElFenix]

Originally posted by: Special K

Doesn't OPEC ultimately set the spot price of a barrel of oil? If so, does that mean they are buying into all the analyst's prophecies as well and are just raising the spot price along with the price of a futures contract, which is determined by the market?

they're already pumping oil out of the ground as fast as they can. they can't control the market anymore.

 

[Special K]

Originally posted by: sniperruff

a large number of oil future contracts at a premium (such as the $300/barrel expiring at the end of 2008) pushes the current price up. lets say if you see a large number of people are willing to buy a 3G iPhone for $1000 each, you'll probably grab a bunch even when you can buy them at $700 each, even if the price is already deeply inflated.

the original idea of the futures market is to provide insurnace against price fluctuation.

Why would there be a $300/barrel contract for sale right now for 2008? Who thinks oil would get up to $300/barrel by the end of 2008?

 

[sniperruff]

Originally posted by: Special K

Originally posted by: sniperruff

a large number of oil future contracts at a premium (such as the $300/barrel expiring at the end of 2008) pushes the current price up. lets say if you see a large number of people are willing to buy a 3G iPhone for $1000 each, you'll probably grab a bunch even when you can buy them at $700 each, even if the price is already deeply inflated.

the original idea of the futures market is to provide insurnace against price fluctuation.

Why would there be a $300/barrel contract for sale right now for 2008? Who thinks oil would get up to $300/barrel by the end of 2008?

apparently someone does because someone made a futures contract for $300 expiring at the end of 2008. it was reported that the creator should be speculating a war on iran would push oil prices into the sky.

it was also reported that someone created a $150/barrel last year to expire around this time of 2008, and back then people thought it was absurd.

 

[Special K]

Originally posted by: sniperruff

Originally posted by: Special K

Originally posted by: sniperruff

a large number of oil future contracts at a premium (such as the $300/barrel expiring at the end of 2008) pushes the current price up. lets say if you see a large number of people are willing to buy a 3G iPhone for $1000 each, you'll probably grab a bunch even when you can buy them at $700 each, even if the price is already deeply inflated.

the original idea of the futures market is to provide insurnace against price fluctuation.

Why would there be a $300/barrel contract for sale right now for 2008? Who thinks oil would get up to $300/barrel by the end of 2008?

apparently someone does because someone made a futures contract for $300 expiring at the end of 2008. it was reported that the creator should be speculating a war on iran would push oil prices into the sky.

it was also reported that someone created a $150/barrel last year to expire around this time of 2008, and back then people thought it was absurd.

So is each futures contract an individual agreement set by an individual buyer and an individual seller, or do they all sell for the current "market rate price", like stocks do?

 

[LegendKiller]

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Special K

Originally posted by: LegendKiller

Originally posted by: Special K
Thanks for the explanation, although my original question still stands. Can you reply to my post above? It's the one that begins with "But you don't need to buy a futures contract..."

yes, you can buy the oil on the "spot" market. However, when you're running a business, such as a refinery, you need to reduce your risk to the spot market, especially when it can be volitile. You're in the business of running a stable refinery and making money off of refining, not being beholden to a wild and wooly energy market. Thus, you reduce risk through futures.

It's no different than airlines. Southwest has made a killing off of hedging against fuel increases.

It's all about risk reduction.

I deal with the same thing every day, except for it's interest rate swaps and/or currency swaps. The stuff can get pretty complicated, but it's all used in the name of risk reduction.

But why is the spot price rising in response to the futures price? Isn't the futures price just a bet based on what people think the spot price will be in the future, with the spot price being based on fundamentals? Why does the spot price go where the speculators bet it will go?

It's like the speculators are saying "The spot price of oil will rise to $X by August", and so it does. It's like a self-fulfilling prophecy. How is this possible?

I think there's a couple things going on.

1. It is a self-fulfilling prophecy.

2. People who are saying oil will reach $$XXX are the same ones that are buying up the futures.

Doesn't OPEC ultimately set the spot price of a barrel of oil? If so, does that mean they are buying into all the analyst's prophecies as well and are just raising the spot price along with the price of a futures contract, which is determined by the market?

The market sets the price. OPEC just sets the supply.

 

[sniperruff]

Originally posted by: Special K

Originally posted by: sniperruff

Originally posted by: Special K

Originally posted by: sniperruff

a large number of oil future contracts at a premium (such as the $300/barrel expiring at the end of 2008) pushes the current price up. lets say if you see a large number of people are willing to buy a 3G iPhone for $1000 each, you'll probably grab a bunch even when you can buy them at $700 each, even if the price is already deeply inflated.

the original idea of the futures market is to provide insurnace against price fluctuation.

Why would there be a $300/barrel contract for sale right now for 2008? Who thinks oil would get up to $300/barrel by the end of 2008?

apparently someone does because someone made a futures contract for $300 expiring at the end of 2008. it was reported that the creator should be speculating a war on iran would push oil prices into the sky.

it was also reported that someone created a $150/barrel last year to expire around this time of 2008, and back then people thought it was absurd.

So is each futures contract an individual agreement set by an individual buyer and an individual seller, or do they all sell for the current "market rate price", like stocks do?

IIRC each futures contract represent the delivery date and quantity that the seller is willing to sell, so they are all different and there is not really any current price. i guess in general, increases in oil prices pushes most oil future contracts up.

i need to finish reading my finance textbook.

 

[LegendKiller]

Originally posted by: sniperruff

Originally posted by: Special K

Originally posted by: sniperruff

Originally posted by: Special K

Originally posted by: sniperruff

a large number of oil future contracts at a premium (such as the $300/barrel expiring at the end of 2008) pushes the current price up. lets say if you see a large number of people are willing to buy a 3G iPhone for $1000 each, you'll probably grab a bunch even when you can buy them at $700 each, even if the price is already deeply inflated.

the original idea of the futures market is to provide insurnace against price fluctuation.

Why would there be a $300/barrel contract for sale right now for 2008? Who thinks oil would get up to $300/barrel by the end of 2008?

apparently someone does because someone made a futures contract for $300 expiring at the end of 2008. it was reported that the creator should be speculating a war on iran would push oil prices into the sky.

it was also reported that someone created a $150/barrel last year to expire around this time of 2008, and back then people thought it was absurd.

So is each futures contract an individual agreement set by an individual buyer and an individual seller, or do they all sell for the current "market rate price", like stocks do?

IIRC each futures contract represent the delivery date and quantity that the seller is willing to sell, so they are all different and there is not really any current price. i guess in general, increases in oil prices pushes most oil future contracts up.

i need to finish reading my finance textbook.

Anybody can contract at any price they want. It's not about the seller being "willing". The seller is obligated to sell.