On Markets

I found this fascinating article about the functioning of commodity markets:

The writer, Chris Cook, is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.
Can some of our members comment on this article?

To understand commodity trading of today. I would recommend more reading on a condition called "Contango".



Using commodity to hedge against nominal assets have been there for years (gold), Just the idea of using ETFs to arbitrarily "follow" the price of the underline commodity is a post 2000 events.

note

Morgan Stanley chartered more tankers than Chevron last year, according to shipbroker Poten & Partners. And JPMorgan Chase hired a supertanker to store heating oil off Malta last year, likely earning returns of better than 50 percent in six months, says oil economist Philip Verleger. “Many, many firms did this,” he adds, explaining that ETF investors created this “profitable, risk-free arbitrage opportunity” when they plowed into commodities. Futures are bilateral; if someone’s buying, someone else is selling. “And the only way to attract sellers is to offer them a bigger profit,” Verleger says. “So, ironically, passive investors have been sowing the seeds of their own defeat” -- and contributing to the contango that does in their funds.

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Thank you petty officer 1, the article is horrifying.

That was a bit of a heavy read but well worth it. The Asia Times can have such a diverse range of topics sometimes.

Someone is going to have to explain this bit to me.

By way of example, a great deal of money appears recently to have been made in the trading of physical oil, because other market participants who were selling forward physical Brent/BFOE oil contracts did not realize that the buyer had already contracted to repurchase the dark inventory it had leased out in the first place. The hapless sellers who were therefore "squeezed" were then obliged to buy oil expensively to satisfy their forward sale contractual commitment.

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How would a repurchase from dark inventories drive up the price in the open market?

There's a lot of schemes in the stock market. Several years ago many parts of California faced a period where electrical bills shot up from two to five times the normal amount. If your monthly electrical bill was $100 it was all of the sudden $500. This was happening because infamous out of state electrical companies like Eron opened stock trading departments within their own companies where they intentionally traded their own electricity to themselves soley to drive up prices. Then Eron collapsed. Not sure if this was the same thing going on. There were a lot of sad stories of Eron employees losing tremendous amounts of money holding Eron stock. I was gleefully happy. I could care less about these Eron employees because their stock riches came from this scheme to rip-off California residents.

Regarding oil there was an expert in the oil business on 60 Minutes that when oil was at its height at around $147 per barrel only about 5 percent of oil traded actually went to being used. The rest was just speculators driving up the price to make money trading on the market.

I still cant understand the logic in allowing speculators trade in the commodities market. What does it achieve for the end user?

Eron? you must mean Enron. Chanos who is currently taking a short position on the Chinese stock market, blew the whistle on Enron and a lot of that had to do with false accounting, loopholes and the use of SPE's which wasnt picked up by audit firm Arthur Anderson, which also led to their own breaking up.

Chanos said it was going to happen by the end of 2010. We're almost at the end of 2011. And where did Chanos get his information? Gordan Chang who said China was going to collapse back when it joins the WTO. And Gordan Chang said the Chinese were going to buy Facebook during the summer. Haven't heard anything of the sort towards that direction.

CardSharp said:

Someone is going to have to explain this bit to me.




How would a repurchase from dark inventories drive up the price in the open market?

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Participant A offers to sell X barrels at $Y per barrel to Participant B.
A did not have the supply on hand and expected to purchase at a cheaper price what he has already sold. Price goes up, A has to deliver what he promised so he buys X barrels at $Y+1 per barrel from B.
And it keeps going.

AssassinsMace said:

Chanos said it was going to happen by the end of 2010. We're almost at the end of 2011. And where did Chanos get his information? Gordan Chang who said China was going to collapse back when it joins the WTO. And Gordan Chang said the Chinese were going to buy Facebook during the summer. Haven't heard anything of the sort towards that direction.

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AS I suggested to you in the past, dont pay too much attention to what Chanos says I betcha he doesnt really believe in all what he himself nor an amateur like Chang says. Spreading f fear and panic is one of many tactics a short seller uses to achieve his end and why would he want to see his golden goose die?

Futhermore he wouldnt be relying on Chang for info. Short selling is a roll for experts . The most a short seller can ever hope to make is 100%, and that is when he can drive the stock down to zero. Futhermore more if the exchange halts the trading of a stock so that it can investigate the claims against it, the short seller will be bleeding heavily as he still has to pay interest which can annualize out at 100%. on the borrowed stock.

However the skys the limit on how much a stock price can rise.