Do we have an oil bubble?

[Supercilious]

Re: We have an oil bubble : the proof

So you are saying that although ETNs are purely an unsecured debt instrument, they are having some secondary effect on the commodities market because the issuers, to hedge, are buying commodities futures?

Exactly!

Taking for granted that private equity would rather have a beneficial tax structure than a position that is backed by more than a near insolvent bank's word, there is still the problem that the price of a commodities cannot rise unless someone is taking actual physical delivery and stashing it away somewhere waiting to sell it at a higher price in the future. Are you suggesting the hedgers (banks or their agents) are storing oil/grain somewhere hidden?

I think that as already been discussed in detail on this thread... and remember the main objective is not to obtain profits from higher prices of commodities ( from oil to rizuki beans), but to pack as much US deficit as possible into a funky form of good-looking debt paper hedged in commodities.

[Munger]

Re: We have an oil bubble : the proof

I think that as already been discussed in detail on this thread... and remember the main objective is not to obtain profits from higher prices of commodities ( from oil to rizuki beans), but to pack as much US deficit as possible into a funky form of good-looking debt paper hedged in commodities.

So to be clear, we have:

(1) Private equity gives money to banks in exchange for unsecured debt-paper.
(2) Banks use some of that money to buy futures contracts to hedge debt-paper issuance risk.
(3) ?

[Supercilious]

Re: We have an oil bubble : the proof

So to be clear, we have:

(1) Private equity gives money to banks in exchange for unsecured debt-paper.
(2) Banks use some of that money to buy futures contracts to hedge debt-paper issuance risk.
(3) ?

(3) The continuous increase in futures used to hedge debt paper drives up the futures price:

From page 16 of the Opta prospect:

"such hedging activity could potentially increase the closing prices of the Index Contracts"

"Although we have no reason to believe that any of these activities will have a material impact on the prices of the Index Contracts or the value of the Notes, we cannot assure you that these activities will not have such an effect."

(4) the small proportion of slices in a spreads of debt-hedging futures that are escaping recycling through internalization and market buy-sell (in between financial hedgers), and eventually meet a bona fide long commercial hedger (such as an oil refinery) are cash settled. The small loss due to cash settlement of a slices of a spread is a small cost of "doing business", but has as unindented effect of driving up spot prices.

[Munger]

Re: We have an oil bubble : the proof

(3) The continuous increase in futures used to hedge debt paper drives up the futures price:

(4) the small proportion of slices in a spreads of debt-hedging futures that are escaping recycling through internalization and market buy-sell (in between financial hedgers), and eventually meet a bona fide long commercial hedger (such as an oil refinery) are cash settled. The small loss due to cash settlement of a slices of a spread is a small cost of "doing business", but has as unindented effect of driving up spot prices.

If there were a viable mechanism for (3) then you would have a point. As (4) doesn't make any sense, you don't.

See http://krugman.blogs.nytimes.com/200...se-once-again/ ; see also http://krugman.dblogs.nytimes.com/?s=speculation&search.x=0&search.y=0&search=Search

And here's one that seems tailor made for you:
http://krugman.blogs.nytimes.com/200...d-speculation/

[Supercilious]

Re: We have an oil bubble : the proof

If there were a viable mechanism for (3) then you would have a point. As (4) doesn't make any sense, you don't.

See http://krugman.blogs.nytimes.com/200...se-once-again/ ; see also http://krugman.dblogs.nytimes.com/?s=speculation&search.x=0&search.y=0&search=Search

And here's one that seems tailor made for you:
http://krugman.blogs.nytimes.com/200...d-speculation/

CharlesTMungerFan would you please try to read carefully all that has been already said on this thread before using a patronizing tone in your dismissals?
Please read carefully my previous comments on this subjects and if you still cannot understand I'll try to explain it again for you in very plain and simple terms.

[c1ue]

Re: We have an oil bubble : the proof

Actually if there is a corrupt mechanism, it would be using the ETNs as sources of cash.

Once money is put into the ETN, the bank gets it as free float. And they all like free float these days what with all those bad MBS's and what not.

Only when someone wants to liquidate does actual cash have to then be brought back out.

[Supercilious]

Re: We have an oil bubble : the proof

Actually if there is a corrupt mechanism, it would be using the ETNs as sources of cash.

Once money is put into the ETN, the bank gets it as free float. And they all like free float these days what with all those bad MBS's and what not.

Only when someone wants to liquidate does actual cash have to then be brought back out.

Exactly! But if the mechanism based on virtual oil (ETN-like paper) - paper oil (futures)-physical oil is correct, what would be the first sign of a bubble burst? And which link will break first? Physical-paper or paper-virtual?

[c1ue]

Re: We have an oil bubble : the proof

If the Ponzi program is any guide, the limit is reached when no more new money can come in.

In this case, it would be where oil prices drop significantly and for a long enough time that sector rotation out start occurring.

That'll be the tide going out as Buffet as noted.

[GRG55]

Re: We have an oil bubble : the proof

If the Ponzi program is any guide, the limit is reached when no more new money can come in.

In this case, it would be where oil prices drop significantly and for a long enough time that sector rotation out start occurring.

That'll be the tide going out as Buffet as noted.

Would the 2006 price action in crude qualify for your significant oil price drop for a long enough period of time? Looked like sector rotation to me when it happened, but it didn't mark the end of the secular trend by any means...

[c1ue]

Re: We have an oil bubble : the proof

Would the 2006 price action in crude qualify for your significant oil price drop for a long enough period of time? Looked like sector rotation to me when it happened, but it didn't mark the end of the secular trend by any means...

GRG,

Can you post what this price action is?

Because the info I see would not seem to urge an oil sector investor to divest:

[Supercilious]

Re: We have an oil bubble : the proof

If the Ponzi program is any guide, the limit is reached when no more new money can come in.

In this case, it would be where oil prices drop significantly and for a long enough time that sector rotation out start occurring.

That'll be the tide going out as Buffet as noted.

You may be right. But how will that look. A sharp initial decrease in open interest in the context of a nearly flat or or moderate decrease in price and markets volume, followed immediately by a strong contango?

At the end of that month maybe we will see also a sharp decrease in the market cap of long ETN-like paper (deficit investors rushing to get their money out through repurchasing with the issuer/originator).

[c1ue]

Re: We have an oil bubble : the proof

Unfortunately the only signal you can use in this case is net in/outflow of funds, and that is a lagging indicator.

An interesting case - especially with the oil price dropping so quickly recently, but not actionable except via avoidance.

[Supercilious]

Re: We have an oil bubble : the proof

Unfortunately the only signal you can use in this case is net in/outflow of funds, and that is a lagging indicator.

An interesting case - especially with the oil price dropping so quickly recently, but not actionable except via avoidance.

Do you have any charts for cumulative in/out flows and volumes and outstanding interest for Nymex, ICE and Dubai?

That would be interesting to take a look at ;)

[Supercilious]

Re: We have an oil bubble : the proof

Still looking for good data. This is all what I could found from Nymex site:

Quotes - U8 7/22/2008 Session
Last 127.25
Change -3.09
Previous 127.25
Most recent settle 127.95
High 132.07
Open Interest 23594
Low 125.63
Volume 35997


Quotes – U8 7/23/2008 Session
Last 128.10
Change -0.32
Previous 128.10
Most recent settle 128.42
High 128.66
Open Interest 316982
Low 128.01
Volume 579

Anyway, that's data only for physical CL and may be completely insignificant. That is not a solid proof the money sunk into virtual oil (debt-paper hedged into oil futures) is vanishing, but it doesn't look good either.



Anybody can provide some cumulative multi benchmark data from Nymex, ICE and Dubai?

[GRG55]

Re: We have an oil bubble : the proof

GRG,

Can you post what this price action is?

Because the info I see would not seem to urge an oil sector investor to divest:

Your chart isn't granular enough to show the price action.

Weekly closing price of Brent Spot on Friday, August 11, 2006 = $77.33 per bbl. Weekly closing price of Brent Spot on Friday, January 19, 2007 = $50.98.

A drop of 34% in 161 days, based on the weekly. The absolute range was larger. WTI was similar of course.

At the time the pundits and chartists were certain (oil was breaking all sorts of technical levels and moving averages on the decline apparently) it was the end of the "bubble". We'll see lots more of these before its over.

$100 is now being talked about as "cheap" oil.

Cheap??? Whew, how quickly we adapt...