Hottest Oil Options Show 18% Drop as Demand Falls

[Godhumor]

Source: Bloomberg

“Oil prices are rising way ahead of reality, way ahead of fundamentals,” said Eugen Weinberg, a senior commodity analyst at Commerzbank AG in Frankfurt. “It would be more reasonable for prices to drop a little and correct to $50 or below.”

Crude jumped as high as $62.26 a barrel on May 20 on optimism that the worst of the global recession and the Organization of Petroleum Exporting Countries agreed to cut supplies by the most on record. Now, economic reports are increasing speculation that the world economy will continue to sputter, and OPEC, which meets May 28 in Vienna, has yet to complete the supply curbs it promised in December.


Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=amoHCH3_ASC8&refer=home

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How many times in how many ways do we have to hear about the price of oil being driven by something other than reality?

[paulsby]

1. i'm a futures trader. that's how it's supposed to work

that's how markets are SUPPOSED to work.

contrary to efficient market theory, markets are NOT efficient. they are chaotic, dynamic systems.

the "reality" is that supply and demand, both of the underlying commodity AND of the derivatives (futures, options, etc.) take into account a host of factors, the way people assess risk, etc.

most of all, futures and options and markets in general are forward looking instruments. they are also hedging instruments.

in other words, markets are not designed to, nor should they be, nor CAN they be, a simple reflection.

if that was true, there could be no edges, no great traders, no poor traders, and no reason to actively invest, since prices would be effectively discounted such that no edge existed, and prices would instantly readjust to the "right price".

i said about a month ago (feel free to search) that both oil and the euro (vs. the dollar) were screaming buys. both advanced handily.

at these prices, i would hedge oil longs or set a tight stop.

but the markets are not supposed to be rational, simple arithmetic instruments. thankfully

[imdjh]

3. I thought it was supposed to react like bunch of screaming little girls

At least, that's what it often looks like.

[paulsby]

4. if you've ever seen the commodities pits

in chicago, that is an apt description.

floor traders tend to come from a pretty blue collar background (fwiw, contrary to people's perception), and there are a lot of athletic types, too. the floor is very physical.

the market is emotional, because people (who make up the market) are emotional.

most people's knowledge of the futures pits (we are about the last nation on earth to still have live human trading) comes from trading places. and that depiction is not wholly inaccurate.

one of the joys of the market is that it is so emotional. to paraphrase kipling, if you can keep your head, while those around you are losing it, you'll do well my son.

[imdjh]

5. It doesn't inspire confidence.

I realize that my emotions aren't relevant- but some of the reactions attributed to "nervousness" and "anxiety" are in conflict with the way we would like to see the people whose actions have rippling effects. Yes, if Canada has a bill on the floor to ban the export of energy, that should make American market folk nervous. But lemminglike dumping of a stock because they reported profits which fell a penny short of "expectations"? I don't get that.

[paulsby]

6. lemminglike dumping

earnings reports are a classic example of "buy the rumor sell the news"

for example, many expectations are purposefully set conservatively so as to avoid negative surprises. when the market figures this out, a meet or fall short by a penny is actually seen as a "bad" report.

also, the dumping is not usually the result of the reported earnings, despite what the pundits say. the guidance is extremely important too.

also, depending on how options traders are hedged prior to the decision, their scrambling to cover positions and/or offset them can result in the same cascading (lemminglike effect).

many traders will have sell stops set at a certain level, and those are essentially electronic lemmings. when the stops are hit, it dumps the price to the next area of heavy bidding, and the bids there can't outweigh the supply, it goes further.

EVENTUALLY the market finds an equilibrium, but the market is only the sum result of ALL trader and investor decisions on ALL timeframes. ferreting out who is doing the moving and where the pockets of supply and demand are, is part of learning to trade.

what's so nice about the markets is taht there is no centralized control to decide what prices "should be". the price is whatever the aggregate opinion is between those who seek to buy and those who seek to sell. ultimately, that is the most fundamentally fair way to assess price that there is.

[Raston]

11. The way it's supposed to work on what planet?

The 'reality' is determined by people who want more profits. 
Don't be dismissive of this, you've seen the lawsuits and the
companies who were found guilty of futures manipulation.  It's
not about 'bull' or 'bear' markets, it's about greed and
manipulation, and anybody who says otherwise is trying to sell
you something.
The real problem is, as you simply but unintentionally pointed
out, that this is just the Republican Way - when the oil
prices spiraled out of control it was very difficult to find
legal fault because future traders like you have disassociated
yourselves from understanding how your 'working the system'
will effect the rest of the nation, no matter how legal it may
be.
Why is it legal?  Who controls the lobbyists?  If it were the
poor or middle class, your tradings wouldn't be legal.  Don't
pat yourself on the back for your intellect and futures sales
while being simultaneously naive - the picture's bigger than
you and your pocketbook.

If you're not angry, you're not paying attention.

[paulsby]

12. ridiculous

study the history of futures markets.

they were invented as a forward looking mechanism to allow both hedging and speculation

CENTURIES ago.

nothing has changed.

republican boogeymen weren't even around back then

it's a capitalism thang. you may not like it. fine.

i'm a capitalist. i like it

[Raston]

13. No changes, 'eh? Uh huh. URL follows.

http://www.materialsmanagement.net/modern_mkt_manipulation.htm

If you're going to be a capitalist, you should understand how other capitalists are using the system and decide whether you want to tout that label. The problem is not running your own business, having business goals and being good with money, it's stealing the money from others while hiding behind the legality, that law put in place by others who wanted to do the same thing.

It's like whether the Geneva Conventions apply to terrorists, who have no country of origin - legally speaking it doesn't, but morally speaking it's a no-brainer (they are, after all, human). Same thing - just because it's legal doesn't mean it's right. a) look at who put the laws in place and for what purpose, and b) consider what kind of person you are that maintains the perspective you do.

I run my own business. My rates aren't based on how much I can milk from my client, but rather on what my time is worth. It is possible to be capitalist -and- moral, you know, but when it comes to futures you're better be paying attention 'cause you're playing on thin ice.

[paulsby]

14. talk about non-responsive

futures markets are a centuries old forward looking mechanism for hedging and speculation

nothing you say changes that.

you don't like the aspects of capitalism that allow for speculation and hedging?

fine.

i do

[Raston]

15. You didn't even read that URL, did you?

Ignorance is bliss, I'm sure you like things just fine.  Those
of us who are capable of Googling 'manipulation futures
market' know better.

Whatever, there's no point in conversing with the likes of
you.  This conversation is terminated.

[dkf]

16. Its all the fault of those greedy home sellers who asked for more than the average joe

could afford!

They should have figured out how the much the average person could pay with a 30 year fixed mortgage using 20% of their income and sold it at that price, even though they could get hundreds of thousands of dollars more.

Shame on them.

Damned capitalist pigs.

[unblock]

18. imagine a world without futures markets

and people would simply be hoarding oil (they'd call it "investing in oil") in order to sell it later.

same thing, really. futures markets just make it easier for the average joe without an oil storage facility to participate.

[imdjh]

2. Last year the emotional crisis point was $4. This year, $2.35?

Last year there was no visible impact on traffic by the price of gas until it hit $4/gallon and then it was like someone had thrown a switch. The streets were dead after 7PM. Walmart's parking lot was nearly empty.

[Hubert Flottz]

10. $2.65 and rising in West Virginia.

[girl gone mad]

17. The problem is that there is a lot less free money in the system.

People are saving more, they are poorer because of vanishing home equity and credit. The drop in oil prices was providing a bit of a cushion, but the cushion is getting thinner by the day. President Obama said and congress said they would stop the speculation, but so far, that's another empty promise.

[florida08]

7. Until they regulate the deregulators

On December 15 2000,the Commodity Futures Modernization Act was introduced by Sen. Richard Lugar (R-IN) and cosponsored by Sen. Peter Fitzgerald (R-IL), Sen. Phil Gramm (R-TX), Sen. Chuck Hagel (R-NE), Sen. Thomas Harkin (D-IA) and Sen. Tim Johnson (D-SD) . The bill was never debated in the Senate. It was passed and signed by Clinton in a 11000 page appropriations bill.

It repealed the Shad-Johnson jurisdictional accord,which had banned single-stock futures in 1982. It also deregulated products offered by banks. The first beneficiary was Enron.

The "Enron loophole" was drafted by lobbyists for Enron working with senator Phil Gramm seeking a deregulated atmosphere for their new experiment, "Enron On-line."

Gramm's “reforms” distorted the commodities markets. When these controls were removed not only did speculators run rampant but prices sky-rocketed. U.S. oil prices are based on Texas intermediate crude but this deregulation outsourced 30% of Texas control to British and Dubai regulators.

Commodity indexes and commodities future markets were originally set up with low margin requirements to give a kind of insurance protection to producers, for example allowing farmers to hedge against crop losses such as what occurred in Iowa, but they were tightly regulated. They were intended to function as a way to provide capital to stay in business and finance production. Now financial institutions have entered these markets, taking advantage of margin rates of 5% to 10% and they are using them to place speculative bets on the direction of prices which they themselves are manipulating.

Treasury Secretary Tim Geithner announced on May 13, 2009 the Obama Administration's intent to amend the CFMA, and related laws of the Commodities Exchange Act and Securities Exchange Act, changing the authority of regulatory bodies, including the Commodities Futures Trading Commission and the Securities Exchange Commission and other regulators over previously unregulated derivatives. In brief, to constrain systemic risks, the proposal requires the clearing of all standardized over the counter derivatives through regulated central counter-parties via a regulated central exchange.

[Waiting For Everyman]

8. It gets a little obvious, doesn't it?

The key word in that article was "speculation", only not as it was used referring to opinions, but literally.

That is not "investing". And it only adds the speculators' profits to the price all of us pay at the pump - it's a stickup for a few bucks each, times millions of people, every day. It shouldn't be allowed on necessities AT ALL.

They'll keep doing this until eventually it's made illegal. Meanwhile we continue being robbed, and when it's banned we won't get our money back.

They're just like the banks. Systematizing theft as it's done now takes the stigma out of it. No one person can be pointed to, and held accountable for it. (And if we complain about it, we're "ignorant" about "how the market works". No, we're not. And each time one of these fake runups is done, more people catch on to it.)

[natrat]

20. sure who will make it illegal? the same people who will implement just healthcare

this country is run by scumbag crooks and if they are making money at something , that's not gonna change. If the last 8 years plus these 4 months have taught us anything it is who runs this country.

[Hubert Flottz]

9. Time to put the windfall profits tax into play...

Let the greedy pay for some of the damage they have done to the economy.

[TheMachineWins]

19. Let's focus on the economy but let manipulating criminals go free!

If anyone dare talks about holding any criminals accountable they'll be labeled "hateful, spiteful, revengeful"!