How Futures determine oil prices

[Hannah Bell]

"A number of high-profile economists, like Paul Krugman, have recently been making the argument that trading in oil futures can't really influence the price of physical oil because it doesn't remove any oil from the market. Here's a classic statement of this argument by Jon Birger, a staff writer from Fortune:


'Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should...be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.'


I will now provide that explanation, and in the process show that both Krugman and Birger are grossly misinformed about the way physical crude is actually priced in the global oil market....

...this change places the futures market, which is a market for financial contracts, at the heart of the current pricing system...Futures aren't a paper bet on the direction of prices determined by some independent process. Futures themselves *determine* the price of most physical oil traded today. The futures price (+ or - the differential) literally *is* the price of oil."

http://peakoildebunked.blogspot.com/

[bananas]

1. Direct link to the article

There are 104 comments: http://peakoildebunked.blogspot.com/2008/07/366-futures-prices-determine-physical.html

[Hannah Bell]

2. Thanks for the direct link.

[bananas]

3. One thing not mentioned in that Peak Oil Debunked blog

he doesn't seem to be aware that Hubbard eventually became anti-nuke pro-solar.
I kept a bookmark to this sub-thread on the oildrum: http://europe.theoildrum.com/node/3678/321210

[dmosh42]

4. Thanks for this post! We need more informative articles....

After seeing all these commodities hearings, which had very scant media coverage, and with the very knowledgeable traders testifying, I know this 'peak oil' thing is just another Repub scam to protect their oil buddies. But what is really getting to me is the lack of legislation to correct any of it. There is only a 5% margin requirement to have a hold on one of these futures contracts! As all those experts testified, just requiring a 40-50% showing of assets will have the speculators backing off, and the price falling.

[Terry in Austin]

9. Informative - what a splendid idea!

Because with "information" like this, who needs wishful thinking?

I know this 'peak oil' thing is just another Repub scam to protect their oil buddies.

And you 'know' this how?

Sounds like you've got some faith-based geology happening there, dmosh.

[dmosh42]

10. Seems you need to watch CSpan to understand.....

That's why they have hearings, so we don't do things on 'faith', but some knowledge.

[Javaman]

5. Crystal ball, tarot cards, astrology...nt

[Hannah Bell]

6. am kick

[TahitiNut]

7. The crude oil commodities market is subject to the same'gaming' as the electrical power market ...

... for California that Enron gamed. If we think of oil tankers and pipelines as transmission lines and wellheads as power generation capacity, we can get a better understanding of how futures, options, and derivatives can be manipulated to strategically drive up the delivery price.

Any (man-made) system can be 'gamed' if there's sufficient effort invested in exploiting it for predatory objectives. Such a 'system' without regulation is the very antithesis to a 'free' market.

[Hannah Bell]

8. pm kick