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Monday, July 07, 2008

The Market Works Just in Time

Another article on speculation in oil markets. BTW I'm going to have another one or two articles on this topic over the next few months, but each will make different (though overlapping) points, tailored to the specific outlet.

9 comments:

  1. Bob,

    Did you see this comment by San Francsco Fed president Janet Yellen, on speculation:

    There has been much discussion about speculative trading in commodities markets and its possible influence on recent price movements. Hedge funds, institutional investors, and other traders have certainly increased their positions in commodity markets, typically by investing in commodity index funds, which consist of baskets of different commodities that trade on exchanges. But I am not yet persuaded that speculation, rather than the fundamentals of global supply and demand, has played an important role in driving up prices. For example, it should be harder to speculate and take positions on commodities that are not easy to trade on futures markets and are not included in index funds. But the prices of individual commodities that are not in index funds have risen just as fast as those that are.

    In addition, if speculators were important in driving prices up, then, at the high prices now prevailing, demand by nonspeculative end users would fall short of current supply, causing inventories to rise. In fact, however, inventories appear to have been declining in most commodity markets.

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  2. No, I didn't see that comment. I like the part about commodities not in index funds going up as much as others.

    However, there is a (by now) standard counterresponse to the inventory argument: people say that Saudi Arabia cut back production because of higher expected future prices.

    I don't know if that fits the data--I still need to check all this for the next article I write on the topic--but it is theoretically possible that speculators could be driving up oil prices, and yet inventories don't accumulate.

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  3. Yeah, Yellen's point on the non-index fund commodties is interetsing. I haven't seen that argument anywhere before, have you?

    I doubt you will find a drop in oil production out of Saudi Arabia. But, we all anxiously await your research results.

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  4. No, I don't think I've seen that point elsewhere.

    From 2005 to 2006, according to the EIA, Saudi Arabia's output dropped 3.9%. (I had that at my fingertips for something else.) I'm not sure what the more recent stuff will show.

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  5. Wow, score one for Janet Yellen. Her speeches used to be boring, bland and uninsightful. I think she has a new speechwriter/researcher.

    As for the Saudi drop in production, two things come to mind. 1. Is the decline oil a resuly of it being held off the market in anticpation of an increase in price or because the Saudi's are not capable of producing at previous levels.

    2. If it was a cut back in anticicpation of higher prices, then what isn't speculation? A builder holding on to his bulding in antcipation of a higher price? A sports star holding out for a higher price? etc.

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  6. "A builder holding on to his bulding in antcipation of a higher price? A sports star holding out for a higher price? etc."

    I'm not sure what ISN'T speculation, but those two actions certainly ARE speculation.

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  7. That's my point. If the Saudi's witheld production. It is not different from the builder or sports star.

    It was a rhetorical question.

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  8. You guys are right, but if outside institutional investors changed futures prices, and this induced Saudis to cut back production, then it would be loosely correct to say, "Speculators are responsible for higher oil prices."

    Of course, if the institutional investors anticipated a war with Iran, sudden jump in demand for oil in 2009, etc., then it would be a good thing that they pushed up oil prices in the present.

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