But... It's Tuesday.

LOL! Good point.

That's what I get for drinking over the weekend.

Call it "Toilet Paper Tuesday" ?

Gen, what do you make of the increase in trading volume on oil futures? I listened to Rick this morning and what he said makes sense to me, but the volume increase and price action to me hints at some speculation.

C'mon Sierra, use your head.

If the price was based on speculation then the last-hour trade would be $10+ off from the back month contracts as anyone holding at the bell is obligated to deliver.

It hasn't happened.

...where do they deliver the actual physical products?

On your front lawn if you're a speculator and caught long at expiration.

That was Rick's arguement exactly. My question was your take on volume - do you think it is an increase in industry hedges? What accounts for the volume increase?

Wheat futures have tanked recently. Would the same arguement hold (saying there is no speculation in wheat) since one would have to take delivery of wheat? I'm not trying to be argumentative here, just looking for the whole picture.

Thanks Gen

...no, I'm serious, where is the stuff backing the paper held? If there isn't enough of it to go around, then wouldn't the longs want to take delivery? Who's in charge of dipping the stick in the tank to see if it's really there?

Yogi, it is delivered literally to you.

The people who short those contracts are obligated to deliver on expiration. You (if you're long) are obligated to buy. How you store it is YOUR PROBLEM.

Note that Wheat's ramp didn't survive expiration. Why? For exactly this reason - as expiration approached reality intruded - you have to take delivery on that wheat and it will LITERALLY be dumped on your driveway if necessary!

I think all this talk about speculation in the media coupled with recent ramp in prices may indeed feed a self-reinforcing loop when the actual consumers (industrial and governments) may begin to stockpile more inventories than usual thus pushing prices higher.

As for speculator being responsible for the recent jump in oil prices - KD, I 100% agree. Net effect of speculative money on overall supply/demand is almost zero.

Interestingly, natural gas and coal have not jumped in price as much as oil over the last 2-3 years.

Yogi - is your point that more contracts can be written than there is oil to deliver against?

I presume you saw Mish's commentary on both Level 3 assets and accounting changes:

http://globaleconomicanalysis.blogspot.c....

Yes.

Crude fundamentals are better than most commodities because switching costs are higher with a much longer lead time.

However, passive allocators and speculators roll contracts forward well in advance of delivery. The resulting increase in physical supply and lowering of physical demand is not typically reflected in a collapse of the front month price for this reason; however, it is reflected in the strip moving from backwardation to contango, followed eventually by a drop in the spot.

This has occured in the last several weeks.

Crude fundamentals, while strong, are somewhat overstated by several factors:

1) Pump price subsidies in many emerging markets, which will have to be removed as the fiscal tax rises

2) An oversupply of heavy crude vs light grades, which will be rectified by a (slow) shift of refining cap from gasoline to diesel.

Right Interested, but the speculative premium is best approximated by the contango premium, and its small.

This does indeed ram those using futures as a hedge (e.g. airlines) but only to the extent of the contango premium. Its not particularly large, when you look at it in percentage terms and then back out the time value of the money tied up in the contracts.

I understand the thought process.

It is very difficult, IMO, to estimate the speculative premium in crude because so much passive allocation has happened in the out years (the 2016 move is just one example) with the goal of riding up the backwardation curve (accrueing the "roll yield"). These contracts are extemely illiquid and the weight of money (from $50B to $250B in overall allocations over the last few years) in small markets have a significant impact, given that price moves at the margin. This has the effect of dragging up the curve since there is no oversupply in light sweet crude and CL is a WTI contract and producers manage production to protect prices despite the jawboning from the Saudis about how crude is far too expensive. OPEC want crude high to pay for their welfare states and forestall demand for democratic changes in their societies.

The roll yield is now negative however, insuring a loss for allocators unless the entire curve shifts up in excess of the contango loss. So the best fundamentals are indeed in the spot still. There is no huge excess supply in the front month, that is certain, except in the heavy grades.

But demand destruction and switching is only starting to be locked into business and design processes and we are now locked into the cycle where we fund alternatives and conserve. This is a very long cycle but it has begun. So we will see demand for crude continue to contract until the price reflects economic viability or until alternatives are adopted.

Supply and demand always meet. The futures markets just help it to happen in a more orderly fashion.

If you want to see what happens when government intervenes look at the recent attempts to do so in Asia and what happened to the spot market. It went ape**** immediately, doing far more damage, as price discovery was disrupted.

...my point is best expressed by the acronym RTFM NYMEX Rules chapter 200. Someone is going to get stuck with a failure to perform.

Spec longs have no place to store crude. Crude is very expensive to store anyway, and the financing costs are outrageous.

Go ask you local gas station how much it costs to fill up their storage tanks now and how they finance it -- you will get the picture.

Quote:

Someone is going to get stuck with a failure to perform.

Are they?

Crude is expensive to store; taking delivery as a speculative trade is not cheap.

I don't think so; where is all the hoarding taking place that has to accompany a real bubble of this sort?

Its missing....

Hey Gen where did that 7% inflation prediction number come from?

Consumer Confidence numbers - they include an inflation survey.

wow thats just ridiculous 7.7% inflation projections so what dose that put us at about a -5.3% real treasury yield. I can see how return of investment can be a little difficult