Why US Dollars rised over teh last day?

[KrazyHorse]

Originally posted by One_more_turn
It seems you are seriously agitated by my arguments.

If you think that's me being seriously agitated you have a surprise coming to you.

[KrazyHorse]

I guess this guy's never seen me tee off on anybody before.

[Kidlicious]

Originally posted by Imran Siddiqui


It's the attempt blame the ev1l corporations! (TM) instead of realizing a lot of the blame falls on the people themselves for buying all sorts of gas guzzling monstrosities (well that and China & India rapidly growing).

What does consumers buying SUV's have to do with wild price swings in commondity prices?

[Imran Siddiqui]

Gas guzzlers = higher demand. Which doesn't help with a war in the Middle East, instability along the Caspian pipeline to Europe, or the rapid industrialization of China and India. People that blame the speculators are the idiots who want to stop buying gas on one day until the price of gas goes down to $1.00 a gallon.

[Kidlicious]

That doesn't explain why the price has dropped so fast. Demand hasn't fallen that much yet. People still drive around in their SUVs.

[KrazyHorse]

Kiddy, the price elasticity of demand for oil is fairly low. That means that any unexpected shift in the near-future expected demand for oil goes through a fairly large multiplier to shift the price.

Duh.

[KrazyHorse]

For all you conspiracy theorists, the hallmark of price fixing is price STABILITY, not price instability. Price instability is a function of low price elasticity of demand and very poor ability to forecast future demand.

[Kidlicious]

Originally posted by KrazyHorse
Kiddy, the price elasticity of demand for oil is fairly low. That means that any unexpected shift in the near-future expected demand for oil goes through a fairly large multiplier to shift the price.

Duh.

The price is falling because speculators expect demand to decrease, not because it has. If they were expecting demand to increase the price would still be increasing.

Anyone who talks about current demand when talking about the price of oil doesn't have a clue.

[Dinner]

Can someone please explain to me how futures work? I realize that by buying a future you are buying the right to buy a set amount of a commodity at a fixed price deliverable at some future date specified in the contract. People who think the price of the commodity is going up are hoping to lock in the current rate rather then buy on the spot market when they absolutely need it.

The part that is confusing me is that something like 90% of the people who buy futures never actually take delivery. So these people are just betting that the price will go up in the future and are hoping to lock in the current price but then sell it on to someone later in the hopes of making a profit. If the price is higher then the locked in contract price then they make money and if the price is lower then the contract price then they lose money. What I don't understand is how this speculation drives up oil prices beyond the very short term because there are still only some many companies with the facilities to take possession of large quantities of oil. Wouldn't the end demand still be fixed depending upon industrial needs?

I mean let's say a bunch of speculators get into a frenzied bidding war and bid up the price of oil futures. At the end of the day 90% of those people won't take possession of the oil so all the oil companies (or other industrial companies who use oil) need to do is wait until the speculators have to sell before the futures deadline and end demand should still be unchanged, right? I admit this exposes industrial uses to greater price fluctuations since they can't look in prices over the long term but in the end the big industrial companies are the only consumers, right?

Of course the real question is why is it desirable to let hedge funds bet on futures? Clearly they're not "investing", I.E. driving new economic activity, and instead it seems like they really are just gambling and by doing so they harm real companies who will actually use oil for industrial needs. Wouldn't it be better to kick the speculators out and just allow companies who will actually take possession of the oil to be the only one's bidding? That way they can better lock in stable prices over the long run and better run their business. It seems like the speculators are just mucking things up for the real economy.

[KrazyHorse]

Originally posted by Kidicious


The price is falling because speculators expect demand to decrease, not because it has.

The price is falling both because current demand has decreased AND because people expect future demand to decrease.

And this is a force for price STABILIZATION. Futures markets provide a means to gain estimates (which tend to be crappy, but better than nothing) of future demand (and supply), which allows for price smoothing over time.

DT.

[KrazyHorse]

Originally posted by Oerdin
The part that is confusing me is that something like 90% of the people who buy futures never actually take delivery. So these people are just betting that the price will go up in the future and are hoping to lock in the current price but then sell it on to someone later in the hopes of making a profit.

No. You don't have to take physical delivery in order to use futures as a hedge. For instance, if I have a fleet of taxis which fill up at retail gasoline outlets, I can use oil futures on the NYMEX as a hedge against rising gas prices. I don't want physical crude oil. It does me no good. But the gain on the futures position (which I close out without taking delivery) offsets any loss from an increase in gas prices. I can still use the highly efficient industrial refining and retail gas distribution networks, while using an extremely low-cost purely financial hedge. Much of the futures markets is composed of hedgers. There are two other major categories of people in commodities futures: arbitrageurs, who use mildly inconsistent prices across markets to pick up risk-free profit (these are the people who keep markets honest; their work makes it cheaper to enter and leave positions by increasing liquidity and ensuring that you get the same price no matter what market you use) and speculators, who are the only ones making truly naked bets.

If the price is higher then the locked in contract price then they make money and if the price is lower then the contract price then they lose money. What I don't understand is how this speculation drives up oil prices beyond the very short term because there are still only some many companies with the facilities to take possession of large quantities of oil. Wouldn't the end demand still be fixed depending upon industrial needs?

Futures markets do not drive up the price of oil any more than they drive down the price of oil. What they do is smooth the price of oil across time. The presence of a liquid market in oil futures and some sophisticated arbitrageurs means that future expectations of oil prices are already priced into spot prices (almost; because there are storage and utility costs associated with oil arbitraging long and short are not exactly equivalent). If there was no futures markets then in order to hedge against increases in oil prices, for instance, you would have to build a giant oil storage tank.

I mean let's say a bunch of speculators get into a frenzied bidding war and bid up the price of oil futures. At the end of the day 90% of those people won't take possession of the oil so all the oil companies (or other industrial companies who use oil) need to do is wait until the speculators have to sell before the futures deadline and end demand should still be unchanged, right? I admit this exposes industrial uses to greater price fluctuations since they can't look in prices over the long term but in the end the big industrial companies are the only consumers, right?

If oil futures increased dramatically above spot prices then I could:

1) borrow money at a fixed interest rate
2) buy oil in the spot market today, paying somebody a fixed storage fee
3) sell oil in the futures market
4) pay off storage and interest charges with money I get from delivery of oil

This is a classic abitrage, and shows how spot and futures prices talk to each other. Note that because people are not stupid the explicit futures market actually obviates the need to actually do this. The knowledge that you could do it keeps the prices in line (mostly).

Now. you are correct in saying that "speculators" can't actually change the time-averaged price of oil. The real supply and demand keep them tied to earth, unless they want to take ridiculous losses. They just smooth out prices. That's it.

Of course the real question is why is it desirable to let hedge funds bet on futures? Clearly they're not "investing", I.E. driving new economic activity, and instead it seems like they really are just gambling and by doing so they harm real companies who will actually use oil for industrial needs. Wouldn't it be better to kick the speculators out and just allow companies who will actually take possession of the oil to be the only one's bidding? That way they can better lock in stable prices over the long run and better run their business. It seems like the speculators are just mucking things up for the real economy.

What if these "speculators" (not all of them are speculators!) know something about probable future demand (for instance) that an oil company does not? The whole idea of the wisdom of crowds is that the aggregated information of the whole market is usually better than the information of some small segment of the market. If you have worse information then oil price fluctuations will be worse than they are today. There is no reason to believe that an oil company knows better than Wall Street types what oil demand will be in the future. If the Wall Street types want to put their own money where their mouth is then why shouldn't they be able to? If they're stupid then they'll go out of business quickly enough and we won't have to deal with their dumb opinions any more. If they do know something that other people don't then they contribute to making the oil market more efficient and smoother.

[KrazyHorse]

The classic example here is onion futures.

http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/?postversion=2008062713

[Kidlicious]

KH,

You call a 90% increase in 18 months stable? That's laughable. And the bust as been even steeper.

[KrazyHorse]

The onion market regularly undergoes 400% price swings. With no futures market and a greater price elasticity of demand.

[KrazyHorse]

And yes, given that oil demand is strongly dependent on something as fickle as overall economic growth, that it has an extremely low price elasticity of demand, that ~50% of the oil supply is controlled by a cartel and that much of the rest comes to us from delightful places like Russia, I consider 90% price swings (on the up side, of course) to be a miracle of stability.