The Audacity of Lies: Obama Takes on the Crude-oil Speculators
The Mouth Is Quicker Than the eye
By blackhedd Posted in CFTC | Crude Oil | Economy | futures markets | Obama | speculation — Comments (42) / Email this page » / Leave a comment »
When you’re Barack Obama, you can pursue an Orwellian rhetorical style because you have several crucial factors in your favor: You’re young. You’re good-looking. You have a pleasant deep voice. And you can blunt any criticism, no matter how cogent, just by saying “You’re only beating up on me because I’m black.”
Now that Obama has thrown campaign-finance reform under the bus (it doesn’t suit his newly-affluent circumstances), he has to deal with the price of gasoline. He’s come out with a rather esoteric set of regulatory proposals to deal with the issue, which has remarkably become perhaps the most important one of the summer.
I’ll take you through a short explanation of what our Hero thinks he wants to do, but as you’ll see, his bottom line is rather different from what you might think it is.
Keep reading…
I’m one of a handful of people who have been telling you all along that a significant amount of the price of oil comes from financial rather than fundamental activity.
There are people who pump oil out of the ground, and they naturally want to sell it. There are other people who turn crude oil into industrial products like gasoline, and they naturally want to buy it. This is fundamental supply and demand.
But there are a lot of people who buy and sell crude oil (in the form of futures contracts, options on futures, in the stock market, and via swaps) only because they think the price will rise or fall in a particular stretch of time. These people are called speculators.
Specs have come in for a lot of angry fingerpointing as the price of crude oil has risen, but they’re an essential part of the structure of commodities markets and always have been. They supply the liquidity that makes it possible for the hedgers to manage their risk.
Now it turns out that speculative activity tends to exaggerate price movements when everyone thinks the market is headed one way or the other. And these days, everyone thinks oil is rising in price (for a lot of reasons, including the global demand picture and the weak dollar), so a significant amount of “paper oil” has been forward-purchased by people who have no intention of actually taking delivery of the stuff.
This accounts for a quite significant amount of the price of oil. How much? My guess is that financial buying accounts for about a third of the barrel price, a solid $45 or even more.
But the real answer is that no one knows. And this is where Barack Obama comes in.
You see, Superman has understood that We The People (that would be schlubs like you and me) don’t think we should be paying $4/gallon for gasoline. There’s enough agita in this both to require a response, and to constitute an opportunity.
While John McCain has come out in favor of increasing supplies of domestically-produced energy as a way of lowering its price, Obama has come out against speculation instead. Hang with me here, because this gets a little hairy.
Everyone who buys and sells commodities on an exchange (like the New York Mercantile Exchange, where crude oil trades) is required to meet some strict requirements. They have to put up a minimum amount of capital, which acts to limit how much they can trade (for NYMEX members, it’s about 8% of the value of the oil they buy or sell); their positions are marked to market every night; and the exchange reports all trading to the Commodities and Futures Trading Commission (CFTC).
But it turns out that for a handful of reasons, an unknown but certainly very large amount of crude-oil trading manages to escape these regulations. A lot of trading goes through the London Intercontinental Exchange (“ICE”), where it doesn’t get reported to the CFTC. And a lot of it isn’t in the form of futures contracts at all, but rather in over-the-counter swaps contracts, that are essentially legal agreements made between hedge funds and large banks or Wall Street firms, and that effectively circumvent the position limits on normal trading.
Now Barack Obama, in full Orwellian mode, wants to blame this non-transparent trading activity on some rule changes that were made during the Clinton Administration. Since they benefited the Enron Corporation in its pas-de-deux with the Devil, these rule changes are called “the Enron loophole.”
And of course, Wendy Gramm (wife of Senator Phil) was a director of Enron and later Commissioner of the CFTC. And you know that Senator Gramm is advising the McCain campaign. So now Barry Orwell Obama is saying that John McCain is to blame for this set of rule changes that Bill Clinton signed into law.
Anyway, Superman says that the key to reducing the price of oil is to “fully eliminate” the Enron loophole. The reason he has to say it like that, is because the loophole has already been closed, and not by him. Several days ago, the current CFTC commissioner announced stricter position limits and reporting requirements for US accounts trading crude oil to take effect in 120 days, even for accounts trading in London. And in any case, the basic transparency problem has been known to the US Senate since 2006, when a Finance subcommittee published a widely-ignored report on the problem.
So Superman thinks he can wave his long, graceful arms, grin his broad grin, and get you to think he will bring transparency to the crude oil markets.
He had the good sense to also recommend that global coordination among regulatory authorities will be required to make this happen, because obviously London ICE answers not to the CFTC but rather to Britain’s Financial Services Authority (FSA).
That sounds like a good idea, except that it’s not Barry’s either. Authorities like New York Fed President Geithner, Treasury Secretary Paulson, and Fed Chairman Bernanke have been saying it for months now, along with eminent private citizens like Alan Greenspan and a host of Wall Street bigshots.
So full transparency in futures trading is many years away, if it’s even possible at all. And at any rate it solves a data problem, not the underlying issue, which is that crude oil is in demand, and not just by people who want to turn it into fuel.
What Obama hasn’t said yet is whether he actually believes that crude oil speculation should be curtailed rather than simply better reported. There is very definitely a role for sensible regulation of futures markets, and there is a role for better regulation than we have today.
I’m entirely open to having this conversation. But I’d really like to see Superman lay his cards on the table first, since he’s running for President and I’m not. Then we can talk.
There is a final bit of irony from Barack Obama when he talks about the price of crude oil (which is important to most people not in itself but because it affects the price of gasoline). Barry is completely convinced (as he has let slip on occasion when he thought we weren’t listening) that the price of gasoline is now too low.
That’s because he wants to force the usage of less oil in the United States of America. That’s why, in dealing with a proximate political problem, he chose to completely ignore the supply side of the oil-price equation.
Let’s be honest about this. You might be able to make crude oil less expensive by curtailing speculation, if you can find a way to do it without completely destabilizing this crucial global market.
But you won’t ultimately make more energy available to American consumers that way. And that suits Barack Obama just fine.
-Francis Cianfrocca (“blackhedd”)
Earth to McCain: Crude Oil Speculation Department — Comments (18) »
The Audacity of Lies: Obama Takes on the Crude-oil Speculators 42 Comments (0 topical, 42 editorial, 0 hidden) Post a comment »
Blame big oil and oil speculators! Yeahhhh then there's a villian and we'll all be content trashing these groups.
Reminds me of an article I read today: http://www.greenfaucet.com/economy/who-is-an-oil-speculator.
Speculation is not the problem here.
Fail.
The Hunt Brothers and silver is the classic modern example. Silver went up stayed up a little while and then collapsed.
Oil seems more amenable to manipulation. You have a tightly controlled supply and an inelastic demand. The question is what is the long term effect the speculators will have ?
Other sources of supply come online at various price points. The Fischer Tropsch process for coal gassification/liquifaction becomes economical at about $30/barrel. Oil shale at about $60 barrel. Other technologies at various price points. As these new sources become available the equations change.
In effect the long speculators are sowing the seeds of their demise.
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
I think most of the speculative pressure in crude-oil is coming from simple momentum. Another very important component is that asset-allocation models for institutional investors have come to include commodities. (If you think it's bizarre to think of commodities as an asset class, you're in very good company.)
Silver is a minuscule market compared to crude oil. I'm having a very hard time imagining how you could engineer a short-squeeze in crude oil. Unless you were Saudi Arabia or Russia, and why would they want to?
If that's what Morgan and Goldman are really up to, they're playing an exceptionally dangerous game. And Wall Streeters don't get paid to take extraordinary amounts of risk. (The Hunt brothers don't count because they're nuts.)
In the Elliot wave/Candle Stick etc kind of sense. Most of the time fundamentals drive stock prices over the long term. You can also usually tell where a stock should be by comparing how its doing to companies in the same industry. The same holds true for commodities.
Short squeezes are the one exception. They leave vary noticeable signatures. Paramount in the mid 80s, Sygate just prior to its demise. Apple when it had its runup from 25 to 75 in the late 80s are all really good examples. If you look at their charts you can see the starts of the squeeze, the manipulation and then the pile on by the momentum players.
I can't imagine trying to set up a short squeeze in as heavily watched a vehicle as oil.
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Iomega on its run from 1.5 to 300.
Haven't seen the like since.
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Francis,
You're dead on about Obama's belief that gas prices are too low. He has already said, in a roundabout way, that he wants to ration our energy, and our food, consumption in this country because Americans are too spoiled. We don't have to suffer enough and we don't give enough to the poor people around the world. Sounds a lot like the five pillars of Islam to me. We as Americans need to fast from oil and food while giving our money to charity. His Global Poverty Act should be enough evidence to support this claim. Obama doesn't care about high gas prices simply because he, like his friends on the left, want to completely do away with big oil and the higher the prices go, the more likely Americans will stop using it.
I've been reading a lot of the liberal blog sites lately and it just baffles my mind how terribly blinded these people are by Obama. I've been posting a lot on www.salon.com to shed some reality on them and ask my fellow conservatives to join me in invading their blogs with conservative ideology.
Liberalism is a disease and the vaccine is a heavy dose of Ann Coulter, Rush Limbuagh and George Bush.
alteratives.
Tightening regs will reduce speculative pressure, and maybe get oil down to the $70-$90 range, which is more than double what it was a couple of years ago.
Nothing is as efficient as the free market if its energies are properly released. Regulation is important, but not the panacea.
and it accomplished nothing except to gum up the system. Reagan deregulated and in a few years the markets were so awash with supply that prices plunged.
So the traders in London are not reflected in the Commitments of Traders Report? Even if they are not, I still do not believe the argument the speculators are in control of this market. Currently the Oil producers are buying a lot more oil than speculators. The speculators are actually extremely short right now.
I just quickly eyeballed last Tuesday's COT and it shows net short interest among non-commercial traders for WTI. But the volume isn't a large number, and oil prices were falling early last week anyway. (The European Central Bank guidance on higher interest rates had come only five days prior to last Tuesday.)
But ICE trading isn't rolled up into the weekly COT, nor are swaps trading. I'm very curious to know the basis for your conclusion that non-commercial trading in crude oil is net short.
I'm sorry I was not clear. My figures are from an COT index developed by Larry Williams that measures how long/short, the specs and comm are relative to 6 months ago.
Unfortunately, the "blame it on the speculators" meme has a long and sordid history of playing well in populist politics in this Country. That said, I do believe it is a major piece of the price problem and may be a part of a coherent plan by various financiers who would really like to see a new messiah in the WH. I know I'm paranoid, but I often wonder if I'm paranoid enough.
In Vino Veritas
http://www.imdb.com/title/tt0000832/
D.W. Griffith was raising that populist cry
Nice to see Obama bringing the "NEW POLITICS" from 1909
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
problem would be infinitely worse. The problem at its base is that human beings are flawed and can't be fixed. The free market best ameliorates those flaws. All prices have an element of speculation, and when it becomes apparent that the US is going to increase supply, it will be prudent to speculate in lower future prices.
Government regulation of speculators is not a peice of the answer to the problem.
Mike DeVine’s Charlotte Observer columns
www.theminorityreportblog.com
"The way to stop discrimination on the basis of race is to stop discriminating on the basis of race." - The Chief Justice
others of his ilk, wouldn't it be in your interest to use your wealth and power to try to manipulate the US economy so that it favors your candidate and your party? Doing so also has the added benefit of preventing the US from increasing supply and thus degrading your asset.
In Vino Veritas
political manipulation of the past 30 years.
free speech
Mike DeVine’s Charlotte Observer columns
www.theminorityreportblog.com
"The way to stop discrimination on the basis of race is to stop discriminating on the basis of race." - The Chief Justice
Just a question, perhaps the most basic question. At this point in time, today, not yesterday or the future, is oil a necessity or just another commodity? If it’s the former, then how can it be treated as a commodity open to hoarding and speculation? Read more at http://www.useconomycrisis.com
US Treasury debt is obviously an asset class. But I like to think of it as a commodity as well. (It's a raw material used in an industrial process which creates pensions.)
But real, physical commodities like oil are now being used as an asset class as well. The standard asset-allocation models used by institutional investors now often include a specific percentage of the portfolio that is to be invested in commodities. The idea has taken hold among professional investors that rising global demand (particularly from Asia) combined with fundamental supply constraints, means that commodities like oil have a stable long-term value, just as real estate or government debt does.
I'm not clear on the distinction you make between necessity and commodity. Are you saying that anything which is deemed a necessity should have an availability guaranteed by the government? If so, then I'm sorry, but the market makes those decisions better than government can.
I want to note, for your safety and security, that in all liklihood the black helicopters will be coming for you in the next few hours.
____
CongressCritter™: Never have so few felt like they were owed so much by so many for so little.
Forgive me if I'm missing something here, but does the Hope-Child believe that the SEC somehow has authority over all worldwide financial transactions? If a Frenchman wants to buy an oil-future off an Italian on Brent Crude, I'm lost as to how he plans to regulate it, and as oil prices won't ever vary that much globally it will affect crude prices in the US just the same.
But he probably knows that and doesn't really care as long as it convinces the bitter-classes....
You indeed nailed that speculation has a substantial role in the barrel price long ago. This included (in my opinion) the very important aspect of a weak dollar which drives investments to commodities. However, the CFTC has seen this coming long before Congress, albeit they move too slowly. In fact, they are already close (or perhaps finished) to an agreement with Dubai which is right behind London as an energy trading center. By the way it’s interesting that London currently trades only about 15% of WTIC futures. That does not seem to be a terribly big portion of the market.
The interesting part will be FSA’s response (BTW - more today in Congress as the chairman of ICE Futures Europe testifies). They have not been terribly interested in US Regulators reaching into their markets. This is of course one small piece that Obama and friends miss as they try to pull a three-card-monty and distract folks from simple facts such as more domestic supply will help as part of a comprehensive energy policy that decreases imports, decreases consumption and transitions to other sources.
In that latter regard; a question for BHO and friends; if part of the reason “speculators” invest millions in oil futures has to do with a potential dearth of supplies why not put more supply into the market and deflate their position value? Oh, that’s right Marxists need enemies of the state to perpetuate their existence. What type of people buy this elitist, undereducated, contra-intellectual junk?
Maybe next they can find a way to stop speculation in overvalued stocks like Hanesbrands and drive down market price to something more in line with Congress' liking. As a remedy they can pass the "Go Commando Act" and stop the buying of undergarments to decrease demand and make the price easier to bear (or is it bare?).
Honestly, ever time they talk I swear even the lid on Hamilton's grave at Trinity moves.
"Nec Aspera Terrent"
bene ambula et redambula
Contributor to The Minority Report
...I'll look for the old bastard's grave and drop one of those little green-ink pictures of him I have in my pocket on it. In your honor.
:-)
even in it's current state of value.
Substitute a picture of Aaron Burr and we will call it even.
"Nec Aspera Terrent"
bene ambula et redambula
Contributor to The Minority Report
trust me, it takes more than a Hamilton to make them happy. For all we know, they're still charging him rent!
And herein lies the problem. It's too complex a problem for a majority, but probly like 70-80% of the population to understand let alone grasp that there have been calls to amend the loophole.
Platitudes are an Obama specialty and this is an opportunity to spin it long and fast simply because most do not know better. And let's face facts. While there is some growth in the drill here drill now push, the delay in bringing that product to market will harm, in the short term either sitting president. People will see daily the $4.00/gal being paid and be upset.
_____________________________
It is the mark of an educated mind to be able to entertain a thought without accepting it.
--Aristotle
Liberal despotism needs a despot and that is what Obama's sells.
All your problems are caused by someone else and the solution is to punish the oppressors (unless you are a country like Iran, then you were not hugged enough as a kid) and make individuals more reliant on government; steal your freedom and personal responsibility one issue at a time.
What you see from most conservatives are ideas and solutions that implore free markets, personal accountability and responsibility; the basic tenets of freedom.
A little common sense and momentary thinking would bring this all to a screeching halt.
"Nec Aspera Terrent"
bene ambula et redambula
Contributor to The Minority Report
"A little common sense and momentary thinking would bring this all to a screeching halt."
--Like thats going to happen in this era of hope and change.
_____________________________
It is the mark of an educated mind to be able to entertain a thought without accepting it.
--Aristotle
So let me see if I get this straight. Barry doesn't mind $4 gas, he just doesn't want speculators making money on $4 gas. Yeah that sounds like a liberal position to me.
Obama LIKES $4 gasoline as long as it gradually climbs to that $4. The public won't notice a slow gradual climb, like the frog in the gradually hotter water, until it boils and he is cooked.
Both aren't stupid enough to stay in a boiling pot of water.
http://www.snopes.com/critters/wild/frogboil.asp
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
it is time to take Energy Speculators out of the market and end the Enron Loop hole.
You are paying $2 a gallon just so an individual or large money fund can get rich.
you would go speculate yourself and make the big bucks.
Speculation is the lubrication of capitalism. Limit specuation, and it becomes harder for buyers and sellers.
Any oil transaction between a willing buyer and willing seller
is not something the government should interfere with.
Great article in Forbes about how speculators have taken over the Energy market with the help of the Enron loop hole and are pick-pocketing your wallet with every fill-up far more than Uncle Sam could have ever dreamed off.
The Enron loop hole was closed last week. This has been mentioned on this blog.
Thanks for playing.
Now also found at The Minority Report
I haven't read the Forbes article mentioned in the comment you replied to, but speculation is a natural part of commodities markets, and you can't get rid of it by enforcing some position limits and reporting requirements.
At the very least, people will be able to trade futures contracts in other countries.
Besides, it would be an incredibly bad idea to reduce speculation, which Obama might actually want to do (although he hasn't said that in so many words). That's a way to ensure that crude oil will be harder and more expensive than ever to obtain.
You said about Obama:
"And you can blunt any criticism, no matter how cogent, just by saying “You’re only beating up on me because I’m black.”
When did he say that?
Goodness knows that there is a lot about Obama to disagree with, but it seems to me that he has bent over backwards to avoid saying such things.
Gar
people that are not like them".
Yes, just like God and guns. The lazy ass conservative press managed only to disseminate the two one syllable "g" words, but Obama also included the racism charge too.
He is the racist,
Mike DeVine’s Charlotte Observer columns
www.theminorityreportblog.com
"The way to stop discrimination on the basis of race is to stop discriminating on the basis of race." - The Chief Justice
...days ago, in which he warned that the Republicans' plan to run against him would be based on instilling fear on account of him being black.
Obama is a smart man and he knows how to press his rhetorical advantages. His response to every question on any subject from now till the election will include code words designed to paint McCain as old, and Republicans as racists.
McCain's age is fair game, that's an important issue in the campaign.
But by God, don't be calling me a racist: I'll fight that from now till the end of time.
Barry is the emptiest of empty suits. I only hope we can find the key to making the voting public understand this before November. This gas price issue could be the ticket.
But, unfortunately, people are blaming speculators and Big Oil™ for a grand world-wide conspiracy to jack up the price of oil so that people can't afford it. Before we can convince voters that Obama doesn't know what he is talking about, and that cars don't run on hope, we have to first convince them that business aren't interested in making their products unaffordable.
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Damn the Obama! Full speed ahead!