Brian27's Comments Stream Stats
- 37 Comments, 0
, 0 
- Total Comment Stream rating - = 0
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright
Economics of Oil Futures Trading, Part I
hsgac.senate.gov/publi...
His argument is that the managed funds allocate a percentage of their portfolios to commodity futures indexes. This increases future prices and by arbitrage spot prices. To quote Masters
"There is a crucial distinction between Traditional Speculators and Index Speculators: Traditional Speculators provide liquidity by both buying and selling futures. Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.
It is easy to see now that traditional policy measures will not work to correct the problem created by Index Speculators, whose allocation decisions are made with little regard for the supply and demand fundamentals in the physical commodity markets. If OPEC supplies the markets with more oil, it will have little affect on Index Speculator demand for oil futures. If Americans reduce their demand through conservation measures like carpooling and using public transportation, it will have little affect on Institutional Investor demand for commodities futures.
Index Speculators’ trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits. "
Index speculators maintain the dollar value of their positions, rolling over at expiry, without regard to expectations about future prices. That means they can take unlimited losses if future prices fall.
Futures investing without expectations of future prices appears to be a recipe for disaster since other market participants (traditional speculators and risk hedgers) will take positions based on price expectations. So if supply is increased or demand decreases hedgers and traditional speculators can inflict huge losses on the indexers by short selling. How long will that last before the index speculators are done?
Another problem with the Masters argument is that their is no physical delivery of the product to index speculators. They are not buying up scare resources for profit. If they were they would have to store it or sell it into the market to recoup their costs.
Economics of Oil Futures Trading, Part II
One note: Under excessive speculation with a huge run up in future prices one would expect that current supply would be dragged into the future by an increase in inventories.
Economics of Oil Futures Trading, Part I
Assume the storage cost is $1 over two years. This results in a futures price of $117 for a barrel of oil two years in the future.
Suppose that the actual future price is $114 then the arbitrageur will borrow a barrel of oil and sell at the spot price of $100 (short sale) and buy a barrel of oil in the future at $114. In two years the arbitrageur pays $114 for a barrel of oil and returns it to the lender plus $16 interest and $1 storage. Which results in a riskless profit of $3.00. Buying spot short and long future will continue until riskless profits are zero.
Suppose that the actual future price is $120 then the arbitrageur will buy a barrel of oil at the spot price of $100 and sell a barrel in the future at $120. In two years the arbitragur delivers the barrel of oil to fulfil the future contract. The riskless profit after paying $16 interest and $1 storage is $3.00. Buying spot long and short future will continue until riskless profits are zero.