[Video] Is Oil Price Speculation a Bad thing?

[AlexMerced]

[oyarde]

Is it ? , maybe , maybe not , the most important thing is this , it is traded in dollars , and if the dollar was worth anything it would not be running at over $100 a barrel . The people who have destroyed the value of the dollar are those responsible for putting the country at risk in this energy sector.

[Black Flag]

A man in a line up for gas is interviewed.

Interviewer: "Why are you here?"
Man: "Well, I heard gas prices are going up tomorrow, so I want to fill my car and all my spare gas jugs before the price goes up"

Interviewer: "Why do you think the price is going up?"
Man: "It's all those damn speculators buying and selling based on what they think the price and supply will be in the future, they screw up the market!"

[hazek]

Without speculation you would be hard pressed to have a stable price and a stable supply. Speculation is what provides the necessary liquidity to achieve that.

[ILUVRP]

i agree that true speculation is good and everything will average out as the contracts expire .

the thing is that crude oil being mainly controlled by opec , it is a rigged market , opec will never let the price of crude go down for very long. so why would the big specs ever want a large short position , they can make small money ( to them ) by being short in a short term , the big money will be made on the long side as they get all the help they need from OPEC and ICE .

take corn or soybeans , if the usda came out tomorrow and said there will be 15% more corn/soybeans this year , the price of beans/corn would more than likly drop 20-25% , going limit down for 3-4 days. the reason being c/sb are a true free market.

watching the video alex talks about gasoline most of the time , said something about crude very late , it is not about the cracks (gas-heating oil-diesel ) it all about crude . sort of like the soybean crush ( bean oil--sb meal ), cracks and crushes are the tail of the dog mostly.

[Black Flag]

the thing is that crude oil being mainly controlled by opec , it is a rigged market , opec will never let the price of crude go down for very long.

I do not believe this.
Yes, OPEC has an impact, ...
...but most of the world's oil is outside of OPEC - Russia is the largest supplier of oil in the world, add in Canada and USA, China, etc.

The price of oil is ... this price. Without OPEC it would be .... this price too.

OPEC is reactionary to the price not causative to the price.

[Black Flag]

the thing is that crude oil being mainly controlled by opec , it is a rigged market , opec will never let the price of crude go down for very long.

I do not believe this.
Yes, OPEC has an impact, ...
...but most of the world's oil is outside of OPEC - Russia is the largest supplier of oil in the world, add in Canada and USA, China, etc.

The price of oil is ... this price. Without OPEC it would be .... this price too.

OPEC is reactionary to the price not causative to the price.

[Knighted]

Speculation is a force of good in the markets. To illustrate that, consider this hypothetical scenario. Say that a major middle eastern oil producing country is in the midst of political turmoil which could jeopardize production and/or sales of its oil on the global markets. This has happened many times before.

Without speculators, and if only the immediate consumption of oil was the driver of oil prices, oil prices would remain roughly where they were right up until the day the event occurs in said country. When oil production grinds to a halt in said country and supply is strangled, oil prices would shoot up practically overnight worldwide. A side effect of this huge increase in the price of oil is that it would immediately trigger oil companies to begin ramping up production and considering expanding their exploration for new oil wells. The reason for this is that when the price of oil rises, oil wells that were previously too expensive or difficult to reach now become attractive (profitable opportunities) to the oil companies.

Here is the huge problem with this scenario where speculators do not exist. Because there were no speculators in the market slowly bidding up the price of oil as the stifling of production in said country became more and more likely as we approached the date of the "event", oil companies were not given that vital signal from the markets in advance, in the form of higher oil prices, that more production was needed. Thus, there is now a huge delay of weeks, if not months, for the oil that comes from the oil companies increasing production to enter the markets and increase supply. Huge price shocks like these would cause devastating effects in vulnerable companies and industries, since these businesses can't take measures to prepare for them for a price shock like this that occurs almost overnight like they could for a gradual increase in commodity prices over time. Speculators on the other hand would bid up the price of oil in advance in small increments, thus sending that signal to the markets early that more production may be needed in the future. This greatly reduces the volatility in oil prices over time as well as the occurrence of price shocks.

And if that example isn't enough for you or whoever you are trying to educate about the beneficial role of speculators in the market, then consider this. There are two sides to every trade, a short and a long position. If Goldman Sachs suddenly decides overnight that they want to buy up oil contracts and jack up the prices, there are hundreds or thousands of other firms running their own models showing that there is no fundamental (ie macro) basis for the rapid rise in oil prices. These people will then take the opposite side of the trade from Goldman - akin to a short position, where shares are borrowed and sold, driving prices back down to their former levels. Goldman is left holding the bag, and those short traders have now made bank, betting on a decrease in the price of oil. In fact, since a rise in oil prices reduces the demand for oil, the consumers alone will screw over Goldman's plans by consuming less oil. Speculation can work both ways, and a market where both sides of the trade can be taken ensures that it can't be used simply to drive up the price of a valuable commodity like oil.

[oyarde]

I will sell you a barrel of oil for $150 , next Easter , interested ?

[maskander]

A man in a line up for gas is interviewed.

Interviewer: "Why are you here?"
Man: "Well, I heard gas prices are going up tomorrow, so I want to fill my car and all my spare gas jugs before the price goes up"

Interviewer: "Why do you think the price is going up?"
Man: "It's all those damn speculators buying and selling based on what they think the price and supply will be in the future, they screw up the market!"

the difference is, speculators are using the gas to line their pockets, americans are using gas to fill up their cars... speculation is just that, you aren't actually planning on using the good for anything, just selling it, and thus keeping it from people who need it, that's called greed where I'm from and is what led us into this mess.