Brian4Liberty
06-19-2008, 07:19 PM
This guy has his explanation for current Oil prices...panic in the shorts. Is he correct? Of course no politicians are talking about this, or the appropriate remedies.
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. "
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. "