Bismarck Tribune - Bismarck News - Oil speculation or normal market activity?

Oil speculation or normal market activity?

Aug 08, 2008 - 04:06:47 CDT

By WADE LARSON
Bismarck Tribune

As it turns out, consumers aren't the only ones speculating about the high price of gas.

Oil speculators have been driving the market price for barrels of crude oil up, which in turn caused prices at the pump to jump to over $4 a gallon, said Mike Rud of the North Dakota Petroleum Marketers Association

But it looks like relief is on the way, as legislators and industry leaders are teaming up to crack down on oil speculation.

Rud said that oil speculators artificially inflate the price of gasoline for their own profit.

Non-commercial traders, people not in the industry entering into the commodity market, purchase crude oil on the commodities market, but many only possess the oil on paper; they never take physical possession of the oil. They later sell the oil when the price rises and turn a profit without any of the costs associated with transporting and storing the oil.

"They take it on paper, they sit on it until the price is right and then they sell it."

Rud called it "gaming the market," and called the practice absurd.

As an example, Rud said at one point, a man purchased 46 million barrels of oil. To put that in perspective, Valero, the largest purchaser of oil on the open market, uses about 3 million barrels a day in all of its refineries, Rud said.

"When some guy, who is just a trader on Wall Street, has control of 46 million barrels of oil, someone needs to explain that to the American people," he said. "That's just wrong."

He said in a day non-commercial traders can trade up to eight times the daily amount of oil consumed in the U.S., and the result is artificially inflated oil prices.

However, recent attention from lawmakers and debate over energy policy may have spooked the speculators into selling, and the price per barrel of oil is down from its high of $147 to $118, though the drop in price also could be related to a drop in demand, as consumers begin conserving gas to save money.

But not everyone is sold on the speculators theory. Ron Ness of the North Dakota Petroleum council said he believes speculators aren't the sole cause of the rise in gasoline prices, but are just another part of the market, and that buying oil on the commodities market carries the same risk as buying stock. A risk that is not paying off right now.

"It'd be a bad time to be a speculator, people are going to be caught on both sides of (falling oil prices), just like any commodity or stock," he said.

Lynn Westfall, chief economist for Tesoro Corp., said he believes speculators raise the price of crude, which is the company's highest business cost.

During a press conference on Tuesday at the Mandan Tesoro refinery, Westfall joined Sen. Byron Dorgan, D-N.D., in support of a bill proposed by Dorgan that would require greater transparency in the oil commodities market and raise the required margins for purchase in an effort to bring the price of gas down by reining in speculators.

Westfall said with current margins, speculators need to invest only 5 or 10 cents on the dollar for every barrel of oil they purchase, which keeps their risk low.

In the press conference, Dorgan said the oil commodities market is now dominated by non-commercial traders. In 2000, the oil commodities market was 37 percent pure speculation and 63 percent legitimate hedgers, such as companies like Tesoro who use the market to keep prices stable. By 2008 the numbers had reversed, to 71 percent pure speculation, and 29 percent legitimate hedgers.

But those numbers are likely to change as the price continues to drop.

"With crude oil falling like this, speculators must be taking a beating," Ness said.

But Rud wants to see more done.

Along with higher margins, Rud would like to see position limits, so individuals can't purchase more oil than they can be reasonably expected to use.

"The bottom line is you got non-commercial traders in a market they ought not to be in," he said. "We have no intention of stopping until we get them out. We have no choice."

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Comments

PacificGatePost wrote on Aug 8, 2008 7:39 PM:

" ANOTHER UPSIDE TO DROPPING OIL PRICES - - -

A MORE SERIOUS REVERSAL OF FORTUNE AWAITS A FEW OIL TOTALITARIANS

http://pacificgatepost.blogspot.com/2008/08/down-side-for-some-petroleum-suppliers.html

The world has shrunk in the past twenty years, and new doors will open for democracy. "

dof wrote on Aug 8, 2008 3:34 PM:

" 'Right On'... the problem isn't the individual speculators rather the 'fund' traders who force the markets with the computer generated 'buy' orders and 'sell' orders. They buy and sell the markets based on trends...it has little to do with the actual supply/demand of the product, rather it is a percieved supply/demand. Look at November Wheat '07, February Wheat '08, May Wheat '08.... there wasn't a bushel of wheat harvested during those contract periods and yet look at the price average differences. What it was, was fund traders creating a market. There was no change in supply during those three contract months. Yet people holding only paper were able to garner a profit 3 to 4 times the actual value of the commodity with daily price swings equal to the true value of the commodity only 3 to 4 months prior. Proving the markets were more manipulated than they were actual price discovery. And the fact the 'millionares' don't have the cash is the problem here! They only have to invest a nickel to control a dollars worth of property.... and alot of them borrow the nickel to do it. "

edrews wrote on Aug 8, 2008 3:33 PM:

" The claim in this story about a guy purchasing 46 million barrels of oil is preposterous. That 46 million barrels of oil represents 18 days of ExxonMobil's worldwide production (based on 2008 financials). The margin on those contracts totals in excess of $450 million. There are very few folks who can do that level of cash transaction, and I seriously doubt they would be foolhardy enough to buy 46 million barrels of oil There are position limits in the futures market, and I think this trader exceeded those limits. I'd be interested in hearing who the broker(s) were that handled this/these transaction(s).

This claim has all the markings of urban legend. I hope The Bismark Tribune will verify this claim and force a retraction of the story if it proves to be false. "

Law wrote on Aug 8, 2008 3:18 PM:

" Mr. Rud, how come gas rises right away when the price of a barrel of oil goes up but doesn't come down when a barrel price drops? Oil today is at $118.00 a barrel and the price of gas is where it was when the price was $130.00 a barrel.
Before you criticize and place blame on others, take a good look in the mirror. "

Right On wrote on Aug 8, 2008 1:43 PM:

" Everybody needs to re read MarketsBeatPolitians and ndcoalmans posts! Can anybody give an answer to their very right on questions? They are right on!!!If the oil speculators are going to be hampered then so should all other commodities that are bought and sold everyday.
Also just because a millionare is a millionare doesnt mean he has his money under the bed in cash either! "

Pointless over-the-top greed wrote on Aug 8, 2008 11:05 AM:

" Studies show that when consumers are squeezed with high gas prices, that eventually they cut back on gas consumption. Once consumers cut back and change their habits, they never return to the level of consumption they were at before.

The speculators basically ruin the industry for everyone involved, and then move on to the next industry to destroy. North Dakota will suffer at the hands of the speculators, if they are allowed to continue without some controls to reign them in. "

dof wrote on Aug 8, 2008 10:50 AM:

" Personally, I'd like to see all the speculators who sold oil on paper deliver it. If there is someone holding 46 million barrels of crude on paper... have them deliver it to a pipeline or refinery.... if they can't hmmmm.......take away all their money/property/holdings? Thats kind of what they have been doing to the gasoline and fuel oil consumers who have been forced to pay higher prices do to the games that are being played in the commodity markets... Same goes for the grain traders, if they can't physically handle the commodity they have no business trading the product. When a delivery call is made they had better cough up the goods. Time to start eliminating the 'open ended' contracts. "

joe blow wrote on Aug 8, 2008 9:11 AM:

" Good , its about time and while they are at it look in to building a state oil refinery with the surplus money ND has . "

ndcoalmn wrote on Aug 8, 2008 8:54 AM:

" So if oil speculators can' t purchase more oil than they can use, is it OK if land speculators can't purchase more land than they can actively farm? I wonder what this would do to the record ND land prices reported this past week. "

MarketsBeatPoliticians wrote on Aug 8, 2008 8:09 AM:

" Kinda funny no one now talks about how "specs" are short crude oil...And, if Sen. Dorgan and Co. think we need to crack down on speculators in oil, why not in wheat, corn, etc... After all, it was the specs who drove Mpls wheat to $25/bu this past spring and market forces that brought it back...that's happening in oil now. The politicians need to let the markets work which, if they don't meddle, WILL. "

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