Inflation, Investing and Everything
This article belongs to the NYMEX crude oil price records story arc.
Goldman Sachs, one of the two biggest oil traders on Wall Street alongside Morgan Stanley, said supply and demand, rather than speculators, are responsible for oil's rally. Concerns that the gains in prices are part of a speculative bubble are "unwarranted," said Goldman. Stockpiles would increase if prices were too high relative to supply and demand, bringing excess supplies to the market, analysts Jeffrey Currie and David Greely said in a report yesterday [29 Jun 2008]. "We are not observing anything approaching sustained growth in physical inventories," the report said. "Current prices are supported by supply and demand fundamentals. The commodity markets are not behaving in a way that a speculative bubble would suggest. It is not speculators moving the market, it is the information on forward supply and demand fundamentals that they are conveying."
- In the NYMEX crude oil futures market, or in any futures market for that matter, there are always two sides to a transaction - there is a buyer who is long the trade, and on the opposite side there is a seller, who is short. At any point in time, the price moves based on the fundamentals of supply and demand. Like I said earlier, the speculation premium for crude oil is exactly zero dollars. Unlike what OPEC has been claiming, the speculative premium is not some arbitrary number like $50, $20, $10, or even $5. It is $0.
If some speculator believes that the price of crude oil is going up, there has to be somebody else willing to be on the other side of the trade. Speculators cannot by themselves drive up the price of crude oil on their own, if there is nobody to take them up on the other side of the trade. The converse is also true on the downside. Futures trading is a zero sum game, and works quite differently from stock trading, which is what many people are used to. People have always been mixing the two concepts, treating them the same way, and OPEC has only added to the confusion by insisting that speculation is behind the oil price rising. The mainstream media is for the most part, just as befuddled, and it took Goldman Sachs to come out with this report to set things straight.
Jim Puplava has also touched on this in the recent episodes of his excellent FinancialSense News Hour podcasts. He brought up the point that the crude oil price records being set all this while can only be due to a unsustainable speculative bubble if and only if there have been people buying long into the crude oil futures, taking physical delivery, and then storing the oil somewhere in anticipation of selling it off later for a profit. That has not been the case. The physical oil when delivered is consumed, never to be seen again. Physical inventories are low and dropping, oil fields are depleting, and we are rapidly approaching the date of global peak oil, and in fact conventional light sweet crude oil has already peaked back in May 2005. As T. Boone Pickens puts it, we have 87 million barrels per day of demand, and only 85 million barrels per day of supply. The price has to go up until demand and supply are brought back in balance again. Oil is in a bull market, and we haven't seen anything yet.
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