If you're wondering why driving to work has gotten so expensive, you might want to peruse your pension fund's investments. That's because speculation by institutional investors pouring money into the commodities market may be largely to blame for spiking oil prices, according to testimony on May 20 before the Senate Committee on Homeland Security & Governmental Affairs.
The margin requirement for trading commodities on the NYMEX is 6%. So one oil futures contract 1,000 barrels of crude worth $131,000 can be leveraged with only $8,000 of margin money with a reserve kicker of $3,000. 16 to 1 is pretty good leverage.
Another thing to look at is the amount of oil we use. The US consumes about 22 million barrels per day (b/d), China about 7 million b/d. Total world production is about 87 million b/d. China is not about to set the world on fire with an increase in consumption any time soon. We are the gas hogs, and at these prices you can bet your bottom dollar that we are consuming a lot less gasoline. Look at the Consumer part of the list below. There is not much credibility to the idea that the Chinese are gobbling up oil.
Back in the 1970's we had a supertanker glut. They produced too many. It looks like we have another now.Here's a curious tidbit from Crude Production Blog dated April 18, 2007 (13 months ago).
The cost of transporting 2-million barrel consignments of crude oil from Middle East ports on supertankers may extend a three-week decline because there are too many ships available for hire.
About 104 tankers can reach Persian Gulf ports by May 18, according to a report today from Paris-based ship broker Barry Rogliano Salles. That's already enough to cover the entire month's demand, based on April shipments. More vessels will become available later in the month, increasing the glut.
The biggest supertankers can hold 550,000 tons of oil at 7.2 barrels per ton, which is about 4 million barrels, figure about 4,000 futures contracts. Round trip time from Saudi Arabia to New Orleans is 65 days. Maybe they are full and sitting parked somewhere waiting for oil to hit $200 a barrel.
What's going on??? Refineries are probably cutting back on production of gasoline; people are cutting back on driving. Inventory has to be building up. We have an unknown number of tankers that could be hiding large quantities of oil. We have a lot of investment funds that got burned on real estate, the commodities market could be their last chance to get whole (or get sucked into a black hole).
Look at the chart above. It's a three year chart of the oil futures. Looks a little like the housing bubble. Nah, it's just my imagination running amok again!
There was a corner of the silver market in 1980. Here is a quote from Traderslog.com (the correction is my doing)
In the fall of 1979, the Hunt Brothers, along with some wealthy Arabs formed a silver buying pool and bought up 200 million ounces- the equivalent of half the world's deliverable supply. The price of silver had moved from $2 per ounce in 1973 to $5 per ounce in early 1979 and then rocketed as high as $54 in early 1980.
The officials at COMEX moved to check this cornering of the silver market
by raising margin requirements[by only allowing liquidation orders]. The highly leveraged Hunt Brothers were unable to meet their margin calls, and were forced to sell. The price of silver fell dramatically; on March 27th 1980 the price fell 50% in one day, from $21.62 to $10.80. The Hunt Brothers were forced to declare bankruptcy. Bache Group, which handled of the trades for the brothers, was financially ruined.
Oil has gone from $55 a barrel on up to $132 a barrel. Inflation could account for about $30 of that increase. I wouldn't blame this mess on the oil companies, this has all of the ear marks of a speculative corner of the oil market by parties unknown.
The commodities markets are going to have to limit the number of contracts written and only accept liquidation orders like they did with the Hunts. It's kind of like sticking a broom handle into the spokes of a moving bicycle. It will be quick and brutal. Hold on to your SUV and your hat, another bubble is about to pop.