An explanation for recent Oil Prices?

[Brian4Liberty]

This guy has his explanation for current Oil prices...panic in the shorts.

http://www.investmentrarities.com/06-10-08.html

"There is always a short for every long position in every commodity futures contract. When enough longs panic and sell aggressively, prices plummet. When enough shorts panic and buy back their short positions aggressively, prices soar. Oil prices didn’t jump sharply because many new longs came into the market. They jumped because, at the margin, enough shorts panicked and bought back contracts they previously sold short, to prevent their losses from getting larger.

So while I agree that speculation caused oil prices to jump sharply, at least we should correctly identify which speculators did the buying. It was the shorts, not the longs. In fact, the data shows that the longs were selling. That’s not to say that oil prices won’t plunge in the future. They will, when enough longs panic and sell. To a large extent, this is the trading pattern of most markets.

By correctly identifying the real cause of the recent price spike caused by the speculative oil buying, we come to the real hidden problem with speculation. That problem is that large numbers of shorts are, effectively, trapped with their short positions. The shorts are trapped because the index funds buy and hold for the long term. That doesn’t mean prices can’t go down sharply while the index funds are long. For example, the wheat market rose almost 100% and then fell by 40% with hardly a change in the index funds’ large position. But because the index funds hold and don’t sell, regardless of whether prices rise or fall, large numbers of shorts can’t exit their short positions, even if prices fall. And when prices do fall, there are no complaints about index funds, just when prices rise.

Recently, some commentators have labeled the index funds as not playing fairly, because they don’t sell, but instead invest for the long term. But there is no rule that anyone can’t invest in futures for the long term. The index funds were clear in their intentions as they came into the futures market over the past several years. Everyone knew beforehand how they behaved and they certainly didn’t sneak into the market; because they were so big, you could see them coming a mile away. The shorts initially licked their chops, because they knew the index funds wouldn’t demand delivery and therefore attempt to squeeze the shorts. The shorts also knew the index funds would have to roll over their positions constantly, giving the shorts an opportunity to extort spread advantages due to the mandatory roll-over behavior of the index funds.

But there is such a thing as the law of unintended consequences, and that law has prevailed in the trading dance between the index funds and the shorts. When the index funds initially established their positions in oil or grain futures, there was no extreme tight supply/demand situation. That’s why great numbers of shorts sold into the index fund buying. But then conditions tightened up and the shorts appear to be on the wrong side and are looking for a way out. The easiest solution for the shorts is to have the regulators mandate that the index funds sell.

The real story should be told. It doesn’t seem fair to me to label the index funds as the real speculators when they back their purchases with the full cash value of the contracts and hold for the long term, while casting the short speculators masquerading as commercials, who are out for a quick buck, as innocent victims. If the regulators want to change the rules against the index funds, let them do so. Just don’t pretend these funds are evil and the short speculators are without blame. If we get shortages in oil or grain or anything else, prices will go higher, with or without the index funds. "

[Dieseler]

Do index funds purchase futures for 8 cents on the Dollar?
Do they ever take deliveries of their futures purchases?

[Brian4Liberty]

Do index funds purchase futures for 8 cents on the Dollar?
Do they ever take deliveries of their futures purchases?

I would guess that they never take delivery.

[icon124]

that many people are shorting oil? I mean enough to literally drive the prices up 10-20 percent?

[Indy4Chng]

Good analysis... but you have to consider us printing money we don't have and the devaluation of the $ a bigger factor. Those two items combined are the majority of the price of oil.

[Brian4Liberty]

Good analysis... but you have to consider us printing money we don't have and the devaluation of the $ a bigger factor. Those two items combined are the majority of the price of oil.

The majority of (reputable, non-mainstream) analysts always cite the "dollar factor", and now the mainstream "analysts" are picking it up. But even the guys that were originally on top of the dollar issue said that $80/barrel was monetary inflation. $90-$135 in a couple of months is a classic speculative bubble. And bubbles always go higher and longer than anyone anticipates. Don't expect a pop of this bubble anytime soon.

[DriftWood]

This guy has his explanation for current Oil prices...panic in the shorts.

http://www.investmentrarities.com/06-10-08.html

"There is always a short for every long position in every commodity futures contract. When enough longs panic and sell aggressively, prices plummet. When enough shorts panic and buy back their short positions aggressively, prices soar. Oil prices didn’t jump sharply because many new longs came into the market. They jumped because, at the margin, enough shorts panicked and bought back contracts they previously sold short, to prevent their losses from getting larger.

So while I agree that speculation caused oil prices to jump sharply, at least we should correctly identify which speculators did the buying. It was the shorts, not the longs. In fact, the data shows that the longs were selling. That’s not to say that oil prices won’t plunge in the future. They will, when enough longs panic and sell. To a large extent, this is the trading pattern of most markets.

By correctly identifying the real cause of the recent price spike caused by the speculative oil buying, we come to the real hidden problem with speculation. That problem is that large numbers of shorts are, effectively, trapped with their short positions. The shorts are trapped because the index funds buy and hold for the long term. That doesn’t mean prices can’t go down sharply while the index funds are long. For example, the wheat market rose almost 100% and then fell by 40% with hardly a change in the index funds’ large position. But because the index funds hold and don’t sell, regardless of whether prices rise or fall, large numbers of shorts can’t exit their short positions, even if prices fall. And when prices do fall, there are no complaints about index funds, just when prices rise.

Recently, some commentators have labeled the index funds as not playing fairly, because they don’t sell, but instead invest for the long term. But there is no rule that anyone can’t invest in futures for the long term. The index funds were clear in their intentions as they came into the futures market over the past several years. Everyone knew beforehand how they behaved and they certainly didn’t sneak into the market; because they were so big, you could see them coming a mile away. The shorts initially licked their chops, because they knew the index funds wouldn’t demand delivery and therefore attempt to squeeze the shorts. The shorts also knew the index funds would have to roll over their positions constantly, giving the shorts an opportunity to extort spread advantages due to the mandatory roll-over behavior of the index funds.

But there is such a thing as the law of unintended consequences, and that law has prevailed in the trading dance between the index funds and the shorts. When the index funds initially established their positions in oil or grain futures, there was no extreme tight supply/demand situation. That’s why great numbers of shorts sold into the index fund buying. But then conditions tightened up and the shorts appear to be on the wrong side and are looking for a way out. The easiest solution for the shorts is to have the regulators mandate that the index funds sell.

The real story should be told. It doesn’t seem fair to me to label the index funds as the real speculators when they back their purchases with the full cash value of the contracts and hold for the long term, while casting the short speculators masquerading as commercials, who are out for a quick buck, as innocent victims. If the regulators want to change the rules against the index funds, let them do so. Just don’t pretend these funds are evil and the short speculators are without blame. If we get shortages in oil or grain or anything else, prices will go higher, with or without the index funds. "

Nope, all speculators can do is drive up the price of paper oil, not the real thing. All they can do is drive up the price of futures contracts. A speculator would "rather be dead" than to actually own any real barrels of oil. So they always sell the futures contract before the time comes when they would have to pick the barrel up at the specified location. Speculators dont have ware houses or own refineries.. so they will sell the barrel of oil at any price to people who do. Speculators dont keep any supply off the market and they dont have any demand for real barrels of oil. Therefore they do not affect the price of real barrels of oil. All they are doing is betting on future price of oil. If they are good at predicting supply and demand changes of real oil barrels in the future they will be able to sell the futures contract for more than they bought it, if they are bad and get it wrong thet will have to sell the futures contract at a loss.

Just like betting on a sports game does not change the outcome.. neither does speculation on futures contracts, or buying commodity index funds (because they are just a bunch of futures contracts)

(Also buying futures contracts to cover short lossses.. will only drive up the price of futures contracts temporarily, as it does not represent a growth in long term demand.)

Cheers

[Dieseler]

Index speculation is the problem. Aside from inflation of course as you stated in you're post above Brian.

The majority of (reputable, non-mainstream) analysts always cite the "dollar factor", and now the mainstream "analysts" are picking it up. But even the guys that were originally on top of the dollar issue said that $80/barrel was monetary inflation. $90-$135 in a couple of months is a classic speculative bubble. And bubbles always go higher and longer than anyone anticipates. Don't expect a pop of this bubble anytime soon.

This bubble will not die until it cripples us that is and demand plummets due to common folks not being able to afford the commodity any longer. At that point the damage may be like a terminal cancer to our already weak economy.

If you would care to read up from where I am getting this information it is located here.
It starts off a bit slow but goes into great detail. Please read it all.
If I can understand it anyone can.

http://hsgac.senate.gov/public/_files/052008Masters.pdf

I feel this is something that we must address before it reaches a critical mass but I already know that it will not be.
That is about how much faith I have in our government and this could very well turn out to be the straw that broke the camels back.


Read these articles as well

http://www.star-telegram.com/ed_wall...ry/651928.html

http://www.star-telegram.com/ed_wall...ry/659081.html

I'm going to link a thread to this post in a second by edit.

This thread was sorta hi jacked when the topic of Index speculation was hot a couple weeks ago but theirs a pretty good argument there already.

http://67.225.158.147/showthread.php?t=139918


Leave us be. Let us do. Laissez faire.
I can do that as long as I can afford bread for my kids.
After that point, the shit will hit the fan.

[Danke]

Two Federal Agencies Are Culpable in Oil Price Manipulations

A Secret Oil Gusher Inside Citigroup
By PAM MARTENS

If you want to flush out market manipulation, don’t turn to the sleuths in Congress. They’ve been probing trading of the oil markets for two years and completely missed a company at the center of the action. During that period, a barrel of crude oil has risen from $50 to $140, leaving a wide swatch of Americans facing a choice this coming winter of buying food or paying their heating bill.

The company that Congress overlooked should have been an easy suspect. It launched the oil trading career of the infamous fugitive, Marc Rich, pardoned by President Clinton in the final hours of his presidency. It was at one time the largest oil and metals trader in the world. In the late 90s it bought up 129 million ounces of silver for legendary investor Warren Buffet’s company, Berkshire Hathaway, in London’s unregulated over-the-counter market. In 1990, it was one of the first entrants into an ill-fated Russian oil venture called White Nights. In 2005, while part of Citigroup, the largest U.S. banking conglomerate perpetually scolded for obscene executive pay, it handed its chief and top oil trader, Andrew J. Hall, $125 Million for one year’s work. According to the Wall Street Journal, that was five times the pay package for Chuck Prince, CEO of the entire Citigroup conglomerate that year and $55 Million more than the CEO of Exxon-Mobil.

Given this storied history and two years of congressional testimony on oil trading skullduggery, one would expect to find volumes of current information available about this oil trading juggernaut. Instead, this company’s activities are so secret that its web site (www.phibro.com) is a one page affair and lists only the addresses, phone and fax numbers of its offices in the U.S., London, Geneva, and Singapore. No officers’ names, no bios, no history, no press releases. And while the Wall Street firms of Goldman Sachs and Morgan Stanley have been fingered by Congressman Bart Stupak (D-Mich) for gaming the system, Phibro has completely escaped scrutiny during a seven year period when crude oil has risen an astonishing 697%.

Phibro is the old Philipp Brothers trading firm that has resided secretly and quietly on Nyala Farms Road in Westport, Connecticut as a subsidiary of the banking/brokerage behemoth, Citigroup, since the merger of Traveler’s Group and Citicorp (parent of Citibank) in 1998. Traveler’s Group owned Phibro at the time of the merger. Despite the fact that Phibro has provided Citigroup with $2 billion in revenue over the past three years, the 205-page annual report for Citigroup in 2007 carries only the following one-sentence footnote on commodity income that acknowledges the existence of this company. “Primarily includes the results of Phibro Inc., which trades crude oil, refined oil products, natural gas, and other commodities.”

Combing through government archives, the first noteworthy appearance of Phibro occurs on April 6, 2001, when the Wall Street law firm of Sullivan & Cromwell sent a letter to the Commodity Futures Trading Commission (CFTC), the Federal regulator of oil and other commodity trading, acknowledging that it was representing “the Energy Group.” The letter was noteworthy because it delineated just who had teamed up to grease the oil rigging in Washington: namely, two investment banks (Goldman Sachs and Morgan Stanley); a house of cards that would later collapse (Enron); a proprietary trading firm inside a Frankenbank (Phibro inside Citigroup); and two real energy firms (BP Amoco and Koch Industries).

What the Energy Group had long lobbied for and finally received from its Federal regulator was the breathtaking ability to trade oil contracts and oil derivatives secretly in the over- the-counter (OTC) market, thus avoiding the scrutiny of regulated commodity exchanges, their CFTC regulator, and Congress. The April 6, 2001 letter was essentially to say thanks and interpret the new rules as favorably as possible for the Energy Group.

The change in the law occurred via the Commodity Futures Modernization Act of 2000 (CFMA) and is called the Enron Loophole. (Since Enron’s trading room went belly up along with the company, and Phibro is still trading oil secretly all over the world, it should perhaps now be called the Phibro Loophole.)

What the CFTC also granted the big Wall Street trading firms was a license to sneak under the radar by using computer terminals located in the U.S. while trading oil on foreign exchanges like the Intercontinental Exchange (ICE) located in London but owned by an Atlanta, Georgia outfit that was funded and launched by Wall Street firms and big oil.

On June 3 of this year, Dr. Mark Cooper, Director of Research for the Consumer Federation of America, correctly outlined the problem to the Senate Committee on Commerce, Science and Transportation:

“The speculative bubble in petroleum markets has cost the economy well over half a trillion dollars in the two years since the Senate [hearings] first called attention to this problem…Public policies have made these markets the playgrounds of the idle rich, while consumers suffer the burden of rising prices for the necessities of daily life. We have made it so easy to play in the financial markets that investment in productive long term assets are unattractive…The most blatant mistake occurred when Congress allowed the Commodity Futures Trading Commission to forego regulation of over the counter trading in energy futures…Because there is no regulation of this huge swatch of activity, regulators have little insight into what is going on in energy commodity markets…Large traders who trade in commodities in the U.S. ought to be required to register and report their entire positions in those commodities here in the U.S. and abroad…If traders are unwilling to report all their positions, they should not be allowed to trade in U.S. markets. If they violate this provision, they should go to jail. Fines are not enough to dissuade abuse in these commodity markets because there is just too much money to be made.”

The only correction I would make to the otherwise flawless argument above is that Wall Street is far from the playground of the “idle” rich. Wall Street executives spend every waking minute (and I’ve heard even dream about) how they can separate us from our money, our homes and a voice in Washington. How appropriate that Citigroup’s slogan is “the Citi never sleeps.”

Let’s say the CFTC was not a compromised regulator, was not an audition stage and revolving door for million dollar jobs in the industry it regulates. Let’s say it genuinely wanted to report back to Congress on just how big a player Citigroup is in the oil markets. According to a February 22, 2008 filing with the Securities and Exchange Commission (SEC), Citigroup has over 2,000 principal subsidiaries (meaning it really has more but it’s not naming them). Of these, a significant number are secret offshore entities where records are unavailable to regulators. (For a mind boggling look at this sprawling octopus click here: http://www.sec.gov/ )

So the CFTC can’t get its hands on all records and even in jurisdictions where it can, it first has to know under what names, out of a possible 2,000, Citigroup is trading oil and then aggregate the positions.

On May 6 of this year, Tyson Slocum, Director of the Energy Program at the nonprofit watchdog, Public Citizen, testified before Congress on yet another roadblock preventing a meaningful investigation of oil price manipulation:

“Thanks to the Commodity Futures Modernization Act, participants in these newly-deregulated energy trading markets are not required to file so-called Large Trader Reports…These Large Trader Reports, together with the price and volume data, are the primary tools of the CFTC’s regulatory regime…So the deregulation of OTC markets, by allowing traders to escape such basic information reporting, leave federal regulators with no tools to routinely determine whether market manipulation is occurring in energy trading markets…The ability of federal regulators to investigate market manipulation allegations even on the lightly-regulated exchanges like NYMEX [New York Mercantile Exchange] is difficult, let alone the unregulated OTC market.”

Next comes what can only be described as an act of insanity on the part of the Federal Reserve. After allowing for the repeal in 1999 of the depression era investor protection legislation known as the Glass-Steagall Act in order to let Citigroup house retail bank deposits, investment banking, insurance, stock brokerage and speculative proprietary trading under one roof (the perfect storm that intensified the Great Depression) the Federal Reserve decided on October 2, 2003 that Citi wasn’t scary enough. It needed to allow this company that had already been named in hundreds of lawsuits for securities frauds and manipulations and could not remotely manage itself as a financial firm to ramp up its oil trading business by allowing it to take possession of crude oil on tankers because it would “reasonably be expected to produce benefits to the public.” Here are excerpts from the Fed’s release suggesting the expansive plans Citi had in the oil storage and transport business:

“…Citigroup has indicated that it will adopt additional standards for Commodity Trading Activities that involve environmentally sensitive products, such as oil or natural gas. For example, Citigroup will require that the owner of every vessel that carries oil on behalf of Citigroup be a member of a protection and indemnity club and carry the maximum insurance for oil pollution available from the club. Citigroup also will require every such vessel to carry substantial amounts of additional oil pollution insurance from creditworthy insurance companies. Furthermore, Citigroup will place age limitations on vessels and will require vessels to be approved by a major international oil company and have appropriate oil spill response plans and equipment. Moreover, Citigroup will have a comprehensive backup plan in the event any vessel owner fails to respond adequately to an oil spill and will hire inspectors to monitor the loading and discharging of vessels. Citigroup also has represented that it will have in place specific policies and procedures for the storage of oil… The Board believes that Citigroup has the managerial expertise and internal control framework to manage the risks of taking and making delivery of physical commodities… For these reasons, and based on Citigroup’s policies and procedures for monitoring and controlling the risks of Commodity Trading Activities, the Board concludes that consummation of the proposal does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally and can reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.”

Voting in favor of this unprecedented action was then Federal Reserve Chairman Alan Greenspan as well as current Chairman, Ben Bernanke.

Could the Fed have been more wrong about Citigroup having “the expertise and internal controls to integrate effectively the risk management…?” Two years later, in March 2005, the bipolar Fed had this to say about Citigroup: “Given the size, scope and complexity of Citigroup’s global operations, successfully addressing the deficiencies in compliance risk management that have given rise to a series of adverse compliance events in recent years will require significant attention….”

Today, the situation is as follows: Citigroup has taken $42 billion in credit losses and writedowns in the past year, just announced that more writedowns are coming, and the Fed has an intravenous money feeding tube hooked up between its vault and this banking/brokerage/subprime mortgage lending/oil trading mad scientist experiment.

In addition to the secretive Phibro oil trading unit, Citi has formed Citigroup Energy and moved it to Houston. In a help wanted ad placed in Canada it described itself as follows: “Citigroup Energy is a global energy trading, marketing and risk management company based in Houston with offices in Calgary, New York, London, and Singapore. Our goal is to become the premier global energy commodities marketing and trading organization. Currently our capabilities include trading and marketing derivatives/structured products in power, natural gas, crude and crude products.”

Enron also called itself the “premier” energy trading organization. Apparently impressed with that model, Citigroup Energy has hired a significant number of former Enron traders.

Pam Martens worked on Wall Street for 21 years. She has no securities position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com.

[torchbearer]

Nope, all speculators can do is drive up the price of paper oil, not the real thing. All they can do is drive up the price of futures contracts. A speculator would "rather be dead" than to actually own any real barrels of oil. So they always sell the futures contract before the time comes when they would have to pick the barrel up at the specified location. Speculators dont have ware houses or own refineries.. so they will sell the barrel of oil at any price to people who do. Speculators dont keep any supply off the market and they dont have any demand for real barrels of oil. Therefore they do not affect the price of real barrels of oil. All they are doing is betting on future price of oil. If they are good at predicting supply and demand changes of real oil barrels in the future they will be able to sell the futures contract for more than they bought it, if they are bad and get it wrong thet will have to sell the futures contract at a loss.

Just like betting on a sports game does not change the outcome.. neither does speculation on futures contracts, or buying commodity index funds (because they are just a bunch of futures contracts)

(Also buying futures contracts to cover short lossses.. will only drive up the price of futures contracts temporarily, as it does not represent a growth in long term demand.)

Cheers

That is a very good explanation. I now have your quote in my post history for future reference.

[Dieseler]

Knowing now what was housed in building 7 on 9/11/2001, I would not want to be working in or near any building or city for that matter that housed records for any of these bastards.
I just hope that most of it isn't concentrated to heavily in any one place.

[TastyWheat]

Nope, all speculators can do is drive up the price of paper oil, not the real thing. All they can do is drive up the price of futures contracts. A speculator would "rather be dead" than to actually own any real barrels of oil. So they always sell the futures contract before the time comes when they would have to pick the barrel up at the specified location. Speculators dont have ware houses or own refineries.. so they will sell the barrel of oil at any price to people who do. Speculators dont keep any supply off the market and they dont have any demand for real barrels of oil. Therefore they do not affect the price of real barrels of oil. All they are doing is betting on future price of oil. If they are good at predicting supply and demand changes of real oil barrels in the future they will be able to sell the futures contract for more than they bought it, if they are bad and get it wrong thet will have to sell the futures contract at a loss.

Just like betting on a sports game does not change the outcome.. neither does speculation on futures contracts, or buying commodity index funds (because they are just a bunch of futures contracts)

(Also buying futures contracts to cover short lossses.. will only drive up the price of futures contracts temporarily, as it does not represent a growth in long term demand.)

Cheers
This makes more sense than any other editorial, commentary, rant, blog, or post I have ever read. I really think this whole speculation driving up the price of oil thing is a conspiracy. I have never once heard an argument against speculation that made sense. This is starting to get as bad as the global warming scam. If anyone thinks speculation is to blame then PLEASE, explain it in plain english.

[Brian4Liberty]

Nope, all speculators can do is drive up the price of paper oil, not the real thing. All they can do is drive up the price of futures contracts. A speculator would "rather be dead" than to actually own any real barrels of oil. So they always sell the futures contract before the time comes when they would have to pick the barrel up at the specified location. Speculators dont have ware houses or own refineries.. so they will sell the barrel of oil at any price to people who do. Speculators dont keep any supply off the market and they dont have any demand for real barrels of oil. Therefore they do not affect the price of real barrels of oil.


This brings up a couple of questions...

- When the price of Oil is reported on CNBC, is that paper Oil or real Oil price? Seems like they report both (i.e. sometimes the word "futures" is used when reporting prices of various commodities).

- If I were to make $1 million on Oil futures, where does that money come from?

[Dieseler]

Company A injects huge fricking pile of money into said commodity by calling a bank who then makes purchase at about 8 cents on the dollar.
Company B, C, D, E, F, and G call their banks or that same bank and do the same thing.
Once all of these futures are purchased in mass by all of these companies it creates the illusion of greater demand and causes the value of said commodity to rise in value.

Trick is

A speculator would "rather be dead" than to actually own any real barrels of oil. So they always sell the futures contract before the time comes when they would have to pick the barrel up at the specified location.

So they will sell it somewhere between the price they bought it at originally and the NEW GREATER DEMAND price caused by their manipulation.
Then they simply rinse and repeat.
Its all legal at this time.

Keep in mind, this isn't just some guy at home sitting at his computer using his Etrade software buying and selling or making his piddly little trades. This is HUGE money.
Its not only oil either.
Its being done with all Commodities and it is heaping a great burden among working people.
Thats the way I am understanding it.

[TastyWheat]

I might be getting the hang of this, but there seems to be a ton of misinformation going around. Correct me if I'm wrong here.

The speculator makes a contract from someone (a supplier I assume) to buy oil at some price at some date in the future. The speculator makes money by selling it to someone else (another speculator or someone who wants the commodity itself) for a fee. Whoever purchases the futures contract (say an oil company) would only do so if the oil would be sold below current market value. Otherwise it's a bad contract. If the supplier was getting screwed (selling oil way below market price) then it wouldn't make as many contracts. I don't see a lot of imbalance here.

The only way I can see increased speculation driving up prices is if futures contracts are being made and then broken. I'm sure it's possible to break the contracts but there's no way it could happen often enough to cause an artificial rise in prices.

I think many elements are involved, but #1 is a weak dollar.

[Ozwest]

Oil men and military industrialists in bed together, exacerbating threats to Iran, thereby inflating oil prices.

Not genius stuff...

[Zippyjuan]

The speculator thinks the price of oil will go up in the future. They buy a contract for oil to be purchased at the contract price at a future point. Before the contract expires (and the buyer has to take delivery of the oil) he has to sell the contract to someone else- hopefully at a price higher than he purchased it at.

Who besides the speculator is willing to buy a contract and actually take delivery of the oil? Businesses like say Federal Express who have fuel as an important expense in their operations and for budgeting reasons want to have a locked- in price for their gas so they can know what it will cost them and what adjustments they may need to make in their business operations in the future.

If the contract the speculator bought and is trying to sell them is at a lower price than other futures contracts available, then it makes sense for the company to buy the existing contract from the speculator rather than buying a fresher one at a higher price. If the price of oil has actually gone down, the speculator will have to sell his contract at a loss since he still does not want to actually purchase the oil.