Skip to main content

Politicians' oil argument is flawed

Due to the sheer amount of misinformation and flat out nonsense being broadcasted on the subjects of oil and commodity prices and the supposed price manipulation by speculators, it's important to seek out information from more truthful or knowledgeable sources, rather than relying on the suppositions of ignorant politicians and media demagogues.

With that in mind, I wanted to share a very fine article with you from today's (June 24) Financial Times. Hopefully, it will help to dispel some of the "evil speculator" myths that are still floating around.

In, "Politicians' oil argument is flawed", John Dizard writes of his surprise over politicians' continued willingness to make dogged attacks on commodity speculators, as traders and index investors are blamed for fueling recent price rises of oil and agricultural commodities.

Here, Dizard responds to those who argue that investment demand for commodities (expressed through investor purchases of long positions in futures contracts) is creating artificially high prices for much needed resources.

"Now if it were true that pension funds, insurance companies, evil hedge fund managers etc were all buying large quantities of physical products such as silos of grain and storage tanks of oil, then the peasants with the torches, and their leaders, would have a point. But the investors aren’t buying physical product.

For example, one of Senator Lieberman’s favourite witnesses, hedge fund manager Michael Masters, compared an 848m barrel increase in index speculators’ positions over a five-year period with the 920m barrel increase in Chinese demand. In other words, the speculators were almost as big as China.

Nonsense. Speculators only increase the demand for oil, or any other commodity, when they buy physical product and hold it off the market. So to match the real Chinese demand over that five-year period, the institutions would have had to build an astonishing amount of storage capacity. Using Mr Masters’ numbers, they would have had to fill storage tanks with more than 40 times the capacity available at the Cushing oil terminal in Oklahoma, which is where the WTI (West Texas Intermediate) oil contract is valued. Didn’t happen."

Ah, now we're getting somewhere. You might also be surprised to hear Dizard's claim that certain government policies are having more of an effect on oil prices than speculators. Read the whole thing and find out why.

And as Simon Denham notes in this Telegraph article, any government legislation that seeks to bar investment funds from the futures market or limit speculation is likely to end up driving trading activity over to European exchanges (disclosure: a family member is a CME shareholder).

"So the US is getting hot and bothered once more about those nasty ‘speculators’ who are apparently driving up the price of oil. The Senate looks to be at odds on whether to pass some type of law restricting ‘non end user’ trading in commodities.

Skipping over the rather unfortunate fact that the price actually rose (from $100 to $135) while the exchanges estimate that speculative positions have been pretty much flat. For the country that has been the bastion of capitalism for the last 120 years to moan about the effects of supply and demand and effectively say that “it is not fair, we want to change the rules”, smacks of desperation.

Fortunately for the UK and Europe (whose Futures exchanges would be the main gainers), it appears that US law makers are going to have another Sarbanes-Oxley moment and cripple their futures exchanges."

So we have that to look forward to...

But that's not the only interesting point Denham makes. He also reminds us how the futures market actually works:

"The fact is that futures markets are ‘no net gain’ exchanges, for every buyer there must be a seller. If a big fund is buying oil, up there must be somebody on the other side willing to sell to them and not only this, but at some point, the buyers must unwind their positions.

This would mean that if they really had been just forcing a market higher by buying everything in sight, then when they came to get out of their long positions, the price would fall just as fast, (in fact probably faster, as the commodity would not have the natural resistance to being in uncharted territory to hold it back)."

As the final thrust to his article, which is aptly titled, "Critics of oil speculators and short sellers are missing the point", Denham notes that the furor in the US over "speculative" buying of oil is balanced by British lawmakers' outrage over "speculators" short-selling bank stocks.

Still he wonders, would anyone complain if the targets of buying and selling were reversed, so that speculators were selling oil and buying banks? We doubt it too.

Related articles and posts:

"Plan to bar funds from commodities garners few fans" - MarketWatch.

"Tighter US commodity trading laws may be boon to foreign exchanges" - Pensions & Investments Online.

"Oil vs. Nasdaq: the "bubble view" - Finance Trends Matter.

"Oil: inflation meets tight supply" - Finance Trends Matter.

"Charles Maxwell: $200 oil possible on supply & demand" - Bloomberg.

"Speculators not to blame for high oil prices" - Robert Murphy, IER.

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

New! Finance Trends now at

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  

Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.

Moneyball: How the Red Sox Win Championships

Welcome, readers. To get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter.

The Boston Red Sox won their fourth World Series titleof the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,John W. Henry(with his partners)bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.

This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job off…