VERITAS said... "Collectively, these funds have stockpiled (long on inventory via the futures market) 1.1 billion barrels of petroleum. It’s not like they are actually going to take delivery of these oil barrels, but their stockpiling is tantamount to hoarding 1.1 billion barrels from the real market place. If real supply is constant, one can imagine what the 1.1 billion long positions will do to oil futures prices if they are rolled over."
For every buyer of a contract in the futures market there is a seller of that contract. So who are the sellers ? Right now, the buyers are collectively 'stronger' than the sellers being reinforced by the entrants of new bulls attracted by the seemingly inexorable rise in price. The tipping point will come when price stops rising and the sellers become collectively 'stronger' and attract new recruits to their camp. The futures market is just a tug-of-war between buyers and sellers. There is no hoarding of 1.1 billion barrels from the real market place.
Salvatore_Dali said...
Veritas,
Yes, there can be hoarding because your argument that for every buyer there is a seller of the futures contract does not hold water. If your argument holds water, then there will be no px movement as buyers always equate corresponding seller side?!!
I give you a simple example, lets say there were 20 contract players to start and 10 on buy and 10 on sell, willing buyer willing seller a price of $50.00 was achieved. Next month there were another 20 players, same sized, but 15 were buyers and only 5 sellers... the px would have to adjust to that demand supply. Now there are 10 +15 buyers = 25 buyers. Sellers 10+5 = 15. To match, there has to be an additional 10 sellers, which will come from the buyers taking profit at higher levels. Thus all equal.
But no, the 10 long players who took profit returned in the next month as long players as well. The 25 buyers from previous month stayed long. Then another 20 new contract players come in and 15 were buyers only 5 sellers.
Thus now we have 10 who took profit n came back long. You have 15 who kept rolling and adding to positions and you have another 15 new entrants who went long as well. You have 40 long players and 5 genuine sellers. To satisfy the demand and supply the price has to rise for the longs to consider selling.
You can do the math. The higher the price then there could be speculation on the short side. Some hedge funds could take huge bets that the oil price is a bubble. Hence they went short the next month, however the rolling over of longs plus the deluge of momentum players caused a short squeeze, and the hedge funds cut their losses and bought back, its a spiral.
In a properly functioning market if a price is irrational, the sell side would increase. However, in this case the genuine sellers are the producers and they thought US$110 was a very good price to sell. Now they have nothing to sell for the rest of the year. They can only sell naked, a naked short, which will have to be covered if price moves up some more. The problem is compounded because there are no more natural short side. Those on the short side are getting less and lesser by the day. The only shorts available are those who were long and wanted to take some money off the table.
Hence this may be a very different kind of speculators, the long term kind, who by right should be regarded as investors since their time line is so long.
The ones keep going long are basically hoarding... if not how to corner the gold, silver, tin markets in the past... They never sell. Why they never sell, well if u r diversifying a US$10bn portfolio... u want maybe 15% in commodities, hence no need to sell, and u should not sell a diversification move, its not a trade.
The many ETFs and long only commodity funds launched are are not end consumers. None of those who go long are. The sellers in this equation: oil producers, they sell n they regret the next month, could have sold higher. How can u say there can be no hoarding.
Hoarding means increasingly stockpiling WITH no intention to consume the commodity.
Veritas added: I n the Silver Bubble of yesteryears, Nelson Bunker Hunt initially hoarded the futures contracts, which shot through the roof. I believed he then became greedy,enlisted the participation of the Saudis, and started taking delivery of physical metal to push the price even higher. LME stepped in, changed the rules and the music stopped.
p/s: photo: Charlie Yeung
No comments:
Post a Comment