Markets and EconomyFUTURES PRICE EFFECTS ON CASH PRICES

The role of speculation in the prices of commodities: We focus on the obvious high prices of oil and gasoline right now. I've traded commodities for roughly twenty years. I was there for the Hunt attempted cornering of both the soybean and silver markets, saw gold explode to $850 an ounce, coffee to $2 and so on.

The gold explosion was caused mostly by speculator inexperience with markets; they had been denied gold for almost fifty years and didn't have a clue. The Hunts were fucked by the futures exchanges. One day the exchanges refused to accept any orders other than sell orders and the market collapsed. Lesson: you try to fuck with the guys who have real money in the futures markets who are members of the exchanges they will destroy you. There was no real imbalance in supply demand for either metal and that is why it was so crazy.

So what can speculators "do" to a market. When supply and demand are roughly in balance speculation can cause a move of as much as 15% for a very short period of time. Major futures losses for those holding "long" positions occur when an extra shipment of oil shows up that can't be unloaded at $40 unloads at $39. Longs will bail like crazy. Prices initially fall because tankers full of oil can't just sit around costing money; crews, insurance, failure to generate income by lying in harbor so the tanker owners order sales. Other ships backed up have to similarly lower prices until such time as there are no tankers backed up at the ports. Futures speculators suddenly go "short" (sell futures contracts)and the market starts lower.

Minor speculators move markets up or down on weather fears, communist fears, and so on but you won't see a market move AND STAY at either extremes of high and low prices for very long on pure speculation.

Speculators have been able to force oil and gas futures markets to current highs based on real lack of supply. There is not enough oil to meet demand. There is not sufficient refinery capacity in the U.S. to do much with expanded supply (thanx enviro-nuts) even if we got it. Oil prices will actually fall once it is determined that supply has actually caught up with demand. BUT GASOLINE PRICES WILL NOT COME DOWN This is complicated by the fifty or so different "blends" required by our enviro-nazi pressure groups and supplicant legislators. It is possible that oil companies may just tell California to fuck off while they supply the rest of the country; it is possible that states with fewer environmental restrictions will get unlimited supplies of gasoline til the refiners can find room to fill other demand. Don't look for falling crude prices to immediately relieve gasoline prices at the pump. WE DON'T HAVE THE REFINING CAPACITY. What will happen, and started happening this week, is that the long speculators in the futures market will "unwind" positions.

Here's something most people not in the business don't know. Producers of product; corn, wheat, oil, are almost always "short" the futures; they sell their product before they actually have it harvested or produced; farmers may actually sell a crop before it is planted. That is the function of futures markets; they reduce risk. This means that the "high futures price" is already locked in for the producers. They sold oil back in February at the May "futures price" for $38 a barrel and even if the cash goes to $30 they will still get the $38 because they already have the money from the futures sale in their cash registers. So even if cash drops to $30 they still make money because they already pocketed the $38 from their futures sale. The specs who "unwound" their long positions "switch" and go short (sell in the futures) and drive prices lower very very fast. The "bounce" off the low is caused by too much selling.

So I'd say that specs have no long term affect on markets and next to none in oil prices now. I think you are about to see a quick collapse to the low $30 range begin as soon as next week. This will be real because there is no way that small economies can stay afloat with $40 oil. See my post on the effects of quick price moves on the American economy and imagine what this does to a country in Asia like Thailand or a country like Brazil or Chile. A move of sixty eight cents per gallon of gas on an economy where people earn $50 per week is death. Nobody in the Arab states is that stupid. One OPEC country, Venezuela, would like to destroy every capitalist economy but they won't count for much with the Arabs.

Pssst: gold is at $386, you are up $300 per contract