Do we have an oil bubble?

[metalman]

Re: We have an oil bubble : the proof

When I was talking about a knowledgeable man coming form another village and asked you to refrain from "talk to the hand arguments", I was trying to suggest that if Mayer has the same opinion as me about the correlation between high oil prices and the debt-treasuries recycling into commodities-hedged-paper it would be really funny to see the same people who were very dismissive of this idea earlier in the month, suddenly to accept it when Mayer supports it... That, IMHO, would be again very paris-hiltonish ....

a man walks up to you on the street dressed like a bum and smelling like he hasn't bathed in a month and blurts drunkenly: 'morgan stanley bought commodities with the treasuries it got from the fed in exchange for worthless cdos!'

an anonymous poster writes on an internet site: 'morgan stanley bought commodities with the treasuries it got from the fed in exchange for worthless cdos!'

ej writes: 'morgan stanley bought commodities with the treasuries it got from the fed in exchange for worthless cdos!'

ej quotes mayer saying: 'morgan stanley bought commodities with the treasuries it got from the fed in exchange for worthless cdos!'

they all say the same thing except...

mayer is 90% likely telling a fact
ej is 80% likely telling a fact
the anonymous poster is 50% likely telling a fact
the drunk is 90% likely just blathering nonsense

where do you place yourself in that continuum?

At the bottom of the page there is a link for Read more…. which leads to Premium content. I though EJ's piece was longer. Mea culpa if all of it is available for free.

nah, the site is compliant is all. just checked it out... seems to have gone offline in jan. this year. the next to last story posted reads...

January 19, 2008

Mortgage Lender Jumped To His Death

An executive of a collapsed subprime mortgage lender jumped to his death from a bridge Friday, shortly after his wife’s body was found inside their New Jersey home, authorities said.

The deaths of Walter Buczynski, 59, and his wife, Marci, 37 — the parents of two boys — were being investigated as a murder-suicide, according to the Burlington County Prosecutor’s Office.

Prosecutor Robert Bernardi said Evesham Township police went to the couple’s home in the Marlton section of the township around noon after a male caller asked them to check on Marci Buczynski. Her body was found in a bedroom.

Authorities would not provide further details on her death, saying only that she was pronounced dead at the scene and that the county medical examiner’s office would perform an autopsy Saturday.

About 20 minutes after her body was found, officers from the Delaware River and Bay Authority Police Department received reports that a man — later identified as Walter Buczynski — had parked his car on Delaware Memorial Bridge and jumped from the span.

Crews were searching for his body Friday night.

Bernardi said a motive for the apparent murder-suicide was not immediately clear. The couple’s children were being cared for by family members, Bernardi said.

Walter Buczynski was a vice president of Columbia, Md.-based Fieldstone Mortgage Co., a high-flying subprime mortgage lender that made $5.5 billion in mortgage loans and employed about 1,000 people as late as 2006.

However, it has since filed for bankruptcy and now has fewer than 20 employees. The company had recently filed court papers seeking approval to pay about $1.1 million in bonuses that would be divided among Buczynski and other staffers so the company could wind down its lending operations and go out of business.

it ain't just homeowners doing themselves in!

But let's go back to commodities:
http://online.barrons.com/article/SB...lenews_barrons
Someone else makes the link between liquidity issues and rise of crude and cocoa prices...

huh? it's all about liquidity ala free flowing cheap dollars. that's bart/finster's inflation argument.

[Supercilious]

Re: We have an oil bubble : the proof

huh? it's all about liquidity ala free flowing cheap dollars. that's bart/finster's inflation argument.

Not sure about that. Can you please point me to the thread(s) where their argument is made ?

Interesting food for though from FT:
http://www.ft.com/cms/s/0/0070590a-4...0779fd2ac.html

Speculation can be defined by what it is not, namely, investment.
What is the difference between speculation and investment? Speculation is no longer defined by the people who participate in it. Index buyers from investment banks, hedge funds, pension funds, even private investors are all involved in speculation.


The participation of private investors and pension funds in commodity speculation does not mean there is no case for putting their money into this sector. It could be argued that the purpose is to hedge inflation. In spite of the problem of the new buying helping to stoke inflation further by pushing the prices higher, it remains an obvious hedge. In that sense it may not necessarily be seen as speculation. But can it be seen as investment?


Speculation is increasingly the pursuit of those who do not have what could be termed a “natural” interest in commodity prices. Examples might include an investment bank holding corn or oil futures, or a pension fund buying a raw commodity index product.


Traditionally, when investment is “unnatural” it ends up being criticised. More often than not, this is after it goes sour. The UK Coal Board’s venture into fine art many years ago comes to mind.


Let us not fall for the “I’m just passing it on” argument. For the investment banks that need underlying exposure so that they can package commodities into structured products to sell on to their customers, it can perhaps be seen as investment just as investment in subprime mortgages was needed to create CDOs and asset backed securities.

[Supercilious]

Re: We have an oil bubble : the proof

Two charts and three quotes form the latest CFTC report telling us they can find nothing wrong about oil prices and oil futures market.



AND

Hybrid Instruments: Financial instruments that possess, in varying combinations, characteristics of forward contracts, futures contracts, option contracts, debt instruments, bank depository interests, and other interests. Certain hybrid instruments are exempt from CFTC regulation.
[...]
Managed Money Traders (MMTs): Futures market participants who engage in futures trades on behalf of investment funds or clients. While MMTs are commonly equated with hedge funds, they may include Commodity Pool Operators and other managed accounts as well as hedge funds. While CFTC Form 40 does not provide a place to declare oneself a Managed Money Trader, a large trader can declare itself a “Hedge Fund (H)” or “Managed Accounts and Commodity Pools.”
[...]
A single trading entity cannot be classified as both a commercial and non-commercial trader in the same commodity. Nonetheless, a multi-functional organization that has more than one trading entity may have each trading entity classified separately in a commodity. For example, a financial organization trading financial futures may have a banking entity whose positions are classified as commercial and have a separate money-management entity whose position are classified as non-commercial.

My big question is: how exactly this game of playing at both ends (probably short as a swap dealer and long as an investment fund) works for a large (investment) bank in order to attract and recycle (deficit) treasuries into securities hedged in oil futures?

I can't figure that out, yet.

I believe that is the last piece of the puzzle we are missing in order to understand how exactly the Oil Bubble has been created and how it will burst (or it is bursting right now)...

Any ideas ???

[Guest]

Re: We have an oil bubble : the proof

Two charts and three quotes form the latest CFTC report telling us they can find nothing wrong about oil prices and oil futures market. ... My big question is: ... this game of playing at both ends ... to attract and recycle ... treasuries ... into oil futures? ... Any ideas ???

Yes, hang it up already. Your complex mousehunt is running against the macro trend, which is running contrary to your entire argument. Read the straightforward macro chart and if it flatly contradicts your thesis, either disprove the chart or re-evaluate your thesis. Very large global trends such as this don't lie. It's your theory which is latched limpet-like, onto all sorts of convoluted financial market based conceits instead.

____________


The graph below, taken from the Interagency Task Force's Interim Report on Crude Oil, includes members from the Commodity Futures Trading Commission and several Federal agencies and was set up to examine the effect speculators were having on crude oil futures prices.

WORLD GDP OUTSTRIPS OIL PRODUCTION.JPG.jpg

The conclusion of the Task Force's 45-page, 12,000-word report was that speculators were not driving the price of oil. The real culprit is good old-fashioned supply and demand.

Global growth has been on a tear in recent years, and should climb by more than 4 percent this year. That growth has required oil, a lot of it. The supply of oil, however, has not kept pace. Nor will we see a significant increase in production in the coming year.

For oil prices to continue falling, and to stay below $100 for a sustained period, will require a major global downturn in growth. And the weight of evidence suggests that's not going to happen anytime soon.

[Supercilious]

Re: We have an oil bubble : the proof

Yes, hang it up already. Your complex mousehunt is running against the macro trend, which is running contrary to your entire argument.

Not sure about that. Actually I remember similar charts made for California but for the price of electricity just before the Enron collapse. The majority of analysts at that time were saying the same thing... economic development out pacing ... blah blah blah

It's your theory which is latched limpet-like, onto all sorts of convoluted financial market based conceits instead.

Are you talking about "convoluted financial market based conceits' such as CDO's

The graph below, taken from the Interagency Task Force's Interim Report on Crude Oil, includes members from the Commodity Futures Trading Commission and several Federal agencies and was set up to examine the effect speculators were having on crude oil futures prices.

Really, Lukester if you still believe in the competence and alertness of CFTC to draw any realistic conclusions, probably you also believe there is/was no housing bubble.

Incidentally the 2 charts and 3 quotes from in my post above are from the same report: but they say tomato I say .. ETN-like paper

The conclusion of the Task Force's 45-page, 12,000-word report was that speculators were not driving the price of oil. The real culprit is good old-fashioned supply and demand.

Please read carefully how they reached that conclusion

(to be continued...)

[Guest]

Re: We have an oil bubble : the proof

(to be continued...)

Not by me. But knock yourself out, if you like.

[metalman]

Re: We have an oil bubble : the proof

Yes, hang it up already. Your complex mousehunt is running against the macro trend, which is running contrary to your entire argument. Read the straightforward macro chart and if it flatly contradicts your thesis, either disprove the chart or re-evaluate your thesis. Very large global trends such as this don't lie. It's your theory which is latched limpet-like, onto all sorts of convoluted financial market based conceits instead.

____________


The graph below, taken from the Interagency Task Force's Interim Report on Crude Oil, includes members from the Commodity Futures Trading Commission and several Federal agencies and was set up to examine the effect speculators were having on crude oil futures prices.

[ATTACH]461[/ATTACH]

The conclusion of the Task Force's 45-page, 12,000-word report was that speculators were not driving the price of oil. The real culprit is good old-fashioned supply and demand.

Global growth has been on a tear in recent years, and should climb by more than 4 percent this year. That growth has required oil, a lot of it. The supply of oil, however, has not kept pace. Nor will we see a significant increase in production in the coming year.

For oil prices to continue falling, and to stay below $100 for a sustained period, will require a major global downturn in growth. And the weight of evidence suggests that's not going to happen anytime soon.

and since it's mostly supply/demand, the recession should bring demand and prices down, at least somewhat and for a while.

"Pretty Big Downside" for Oil, Energy Stocks as Demand Falls, Garnick Says

Posted Jul 25, 2008 12:55pm EDT by Aaron Task

Following a rapid, 15% drop from their recent peak, oil prices stabilized around $125 per barrel for a few days but were declining again on Friday.
Numerous reports of oil's demise have proven premature in the recent years. But "as global GDP slows down," Diane Garnick, investment strategist at Invesco, sees "energy continuing to come down" with "pretty big downside" still ahead.

Garnick didn't put a number on it today, but predicted a 25% decline for crude within six months during an appearance on Tech Ticker in late June.
While speculation plays a role, Garnick essentially endorsed my view that supply and demand fundamentals have been the primary driver of crude prices, both up and, more recently, down.

Given her outlook for more downside in energy prices, Garnick recommends investors reduce their exposure to energy stocks where she sees "a lot more downside risk" than in other growth industries, most notably tech.

[Munger]

Re: We have an oil bubble : the proof

Ahh! You got us good $#*! It should not have taken me this long to figure out that you have been waving these preposterous theories around only to bait all-too-serious-minded iTulipers into arguing obvious points with you until red in the face.

Well played, sir!

[Guest]

Re: We have an oil bubble : the proof

and since it's mostly supply/demand, the recession should bring demand and prices down ... Garnick didn't put a number on it today, but predicted a 25% decline for crude within six months ... she sees "a lot more downside risk" than in other growth industries, most notably tech.

Whose recession? The US's, or the entire worlds? You have a group of nations today with an aggregate GDP approaching that of the OECD, for whom a GDP growth rate of 5% - 6% is considered an utterly wretched recession. We fantasize having their recessionary growth levels in our wildest dreams of robust economic growth in the developed nations. Their aggregate oil consumption growth even in the slump years already is nudging out puny consumption decline rates in mature economies, and will thoroughly outstrip them in just another 3-4-5 years. I reiterate the same thing I've said before - fearful eyes cast upon US economic implosion as being "synonymous" with global energy consumption are ideas fixed firmly in the rear view mirror - stuck in the 1990's.

Check back in a year as we head into the "nightmarish US recession which brought the world GDP to it's knees" and see who was right on global consumption growth trends. Consumption will remain stubbornly stuck in an uptrend, and oil prices will remain stubbornly underpinned by consumption, and also by a worsening feedback loop from global inflation. Anyone betting on anything more than fleeting declines here who is termed an "analyst" contributes to the poor forecasting record many of these have enjoyed with regard to the oil price in the past decade.

Further, if Garnick is claiming a 25% decline, what's even remotely newsworthy there as a notable trend change for the petroleum price, after it's risen 100% in the year preceding this slump? In a stock, you'd call that a yawner of a correction. Her 25% decline puts it not too far off the $100 handle while coming down off even the present already declined $126. She's maybe a little high on the decline estimate, but either way, so what? It's a 25% retracement of a 100% rise. Anyway I reiterate my bet, it never breaks below $100 and stays there for an entire month.

Want to take me up on that $200.00 a barrel by 2010 bet? Nobody here is claiming "hyperinflation" is going to eat up 85% of the USD value in two and a half years more. Anyone hiding behind claims that if it gets there this is all "pure inflation" is sitting on the fence, wary of taking the other side of that bet because they are unsure if their bubble burst in oil will arrive to bail out their call. If you see it at $200 a barrel in 2010 it's in large part because the supply demand situation is describing a blistering, runaway uptrend in the BID on oil relative to SUPPLY. All the rest is fudge and blather.

"Garnick didn't put a number on it today, but predicted a 25% decline for crude within six months ... she sees a lot more downside risk than in other growth industries, most notably tech." - in the context of what we've witnessed in crude in the past 12 months, and in the past 3 years, this is a namby-pamby cautious bet which is equivalent to saying "I think now it's gonna come down a quarter of what it rose recently". It says nothing whatsoever about the fundamentals underpinning oil consumption, or global industrialisation.

Now I say for Pete's sake - if this conversation about an oil bubble requires yet more mileage, at least start a new thread, so it's got a new pair of walking shoes to wear! No need to confine it to one thread alone! Have at it Spill more ink and churn it around some more. Then wait and see what "paradigm change" you've actually obtained in twelve months. :rolleyes:

[Supercilious]

Re: We have an oil bubble : the proof

Ahh! You got us good $#*! It should not have taken me this long to figure out that you have been waving these preposterous theories around only to bait all-too-serious-minded iTulipers into arguing obvious points with you until red in the face.

Well played, sir!

You got it only 50% right. You are correct when saying there was some serious baiting involved ,but the thing that, still, everybody refuses to see should be obvious by now.

I hope Martin Mayer will spell the whole story in his interview, or if you don't have patience to wait until you get it form him, you can try to answer for yourself the last question I asked here. ;)

And ... I apologize for baiting .... but sometimes a simple "Follow the money!" is all what you can get

[bart]

Re: We have an oil bubble : the proof

Originally Posted by metalman
huh? it's all about liquidity ala free flowing cheap dollars. that's bart/finster's inflation argument.

Not sure about that. Can you please point me to the thread(s) where their argument is made ?

Just search on Finster's posts with the word oil and it should turn up easily. In excessively short terms, it boils down to the extremely high correlation between the oil price (and commodity prices) and money supply growth.

Does anybody know where can I find daily data on volume, open interest and if possible in/outflows for Nymex, ICE and Dubai oil futures markets ?

I suspect you'll be very unhappy since oil OI has gone up much less than the S&P for example, and the price correlation is also poor when compared to OI, even when including options.

Free historical daily data is unavailable anywhere. Neither ICE nor the Dubai publishes that data either (to the best of my knowledge) but feel free to search their web sites.

Weekly OI data for Nymex etc. though is available from the CFTC COT reports at http://www.cftc.gov/marketreports/co...ders/index.htm

[Supercilious]

Re: We have an oil bubble : the proof

Weekly OI data for Nymex etc. though is available from the CFTC COT reports at http://www.cftc.gov/marketreports/co...ders/index.htm

I know but that's not merely enough to get a good picture. I was hoping some iTuliper would make an act of charity, and provide us some spare change ( a good table or chart from a solid non free source)

Just search on Finster's posts with the word oil and it should turn up easily. In excessively short terms, it boils down to the extremely high correlation between the oil price (and commodity prices) and money supply growth.

Ok. I hope I've done my homework well and read the most relevant posts.
In my understanding (and I appologize if I'm wrong and didn't get the message right), Finster treats the problem as a two commodities exchange system: oil and dollar.

I'm not sure I can agree with Finster's arguments on purely deterministic grounds. I believe the correlation between oil prices and money supply growth in today's oil bubble is generated by the same original source: the recycling of US deficit held by foreign CB's. The huge dollar reserves are a residue of currency peg distortions. As artificial peg systems are more and more difficult to maintain, some of that residue has to be dumped back into the global financial environment. In the previous cycle it resulted in the mortgage credit bubble (and consequently into the housing bubble). In the current cycle it has resulted in the commodities-hedged investment instruments bubble (and consequently in an increase in the price of all commodities from oil, to corn, to rizuky beans and ... cocoa)

In a certain way, I'm actually a Brad Stetser's fan, and I'll quote here some interesting points from his last blog entry:

Too big to fail? Or too large to save? Thinking about the US one year into the subprime crisis

Emerging market financial crises in the 1990s followed a fairly consistent pattern.
The country lost access to external financing.
The sector of the economy that had a large need for financing – firms in Asia, the government elsewhere – had to dramatically reduce its need for financing. Asian investment collapsed. Argentina swung from a fiscal deficit to a fiscal surplus (helped along by its default on its external debt). Turkey began to run large primary surpluses.
Financial balance sheets shrank; credit dried up.
[...]
A year – almost – after its crisis, the US economy hasn’t endured a similar period of adjustment. Economic activity has slumped, but not fallen off a cliff. US households are pinched (and unhappy), but spending hasn’t collapsed. The US current account deficit has fallen, but not by much – the rise in the oil deficit has offset the fall in the non-oil deficit.
[...]
Residential investment has fallen significantly as a share of GDP. But in other ways, the US hasn’t adjusted. Or rather, US policy adjusted so that the economy didn’t have to adjust as much.
[...]
The resulting overall external deficit was financed, at least in part, by the buildup of dollar reserves by the world’s central banks – not by a buildup of dollar-denominated financial assets among private investors abroad. Someone in London was buying US corporate bonds — a category that includes a wide range of asset-backed securities. But the crisis has revealed (I think) that much of that demand came from vehicles sponsored by US and European financial institutions that funded themselves by borrowing dollars. They took on credit risk, not currency risk.
[...]
But a country that runs a large external deficit doesn’t need to just keep credit flowing inside its own economy so that existing “deficit” sectors can continue to run deficits – it also needs an ongoing flow of funds from the rest of the world. The US has gotten that, too.
Not thanks to private investors. Private demand for US debt has almost certainly dried up, though the limits of the TIC data make it hard to demonstrate this conclusively. The last survey concluded that all “private” demand for US Treasuries and Agencies came from financial intermediaries who sold their Treasuries and Agencies to central banks (there wasn’t an increase in private holdings from mid-2006 to mid-2007). If that is still true, central banks total purchases of US financial assets over the last 12 months are now running at close to $680 billion ($330 billion in recorded official inflows — counting short-term flows — and $350 billion in “private” purchases of Treasuries and Agencies). Private demand for US corporate bonds and equities, by contrast, has fallen sharply. Corporate bond purchases over the last 12ms were only $170 billion or so — down from an annual pace of over $500 billion a year before the crisis. Demand for US equities is also down ($65 billion in the most recent 12ms v $175 billion in the preceding 12ms)
And remember, some “private demand” comes from funds that are investing for sovereign wealth funds.
Why has so much credit been available to the US during its crisis, when similar credit wasn’t available to emerging markets facing trouble? (continued ...)

If I've being talking about me being a Stetser fan, let's not about forget those who have a difficulty in reading and understanding anything above the simple terms level. Fortunately, for some of CT Munger fans, I have the right plain language translation:

http://www.theonion.com/content/news...nation_demands

The current economic woes, brought on by the collapse of the so-called "housing bubble," are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.
[...]
"The U.S. economy cannot survive on sound investments alone," Carlisle added.
Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to† begin encouraging massive private investment in some fantastical financial scheme in order to get the nation's false economy back on track.
[...]
The most support thus far has gone toward the so-called paper bubble. In this appealing scenario, various privately issued pieces of paper, backed by government tax incentives but entirely worthless, would temporarily be given grossly inflated artificial values and sold to unsuspecting stockholders by greedy and unscrupulous entrepreneurs.

With sarcasm and jokes aside, I find the relative conceptual convergence of the two quoted sources a little bit unsettling...

[bart]

Re: We have an oil bubble : the proof

I know but that's not merely enough to get a good picture. I was hoping some iTuliper would make an act of charity, and provide us some spare change ( a good table or chart from a solid non free source)

There are highly probable copyright issues with that.

Ok. I hope I've done my homework well and read the most relevant posts.
In my understanding (and I appologize if I'm wrong and didn't get the message right), Finster treats the problem as a two commodities exchange system: oil and dollar.

I'm not sure I can agree with Finster's arguments on purely deterministic grounds. I believe the correlation between oil prices and money supply growth in today's oil bubble is generated by the same original source: the recycling of US deficit held by foreign CB's.

You're free to disagree.

In a certain way, I'm actually a Brad Stetser's fan, and I'll quote here some interesting points from his last blog entry:
...

Setser does some good work. I've been reading him for years. I also believe he under values behind the scenes issues like central bank cooperation.

[Supercilious]

Re: We have an oil bubble : the proof

By the way, going back to the process of recycling deficit, here is an interesting tale of empty threats:

http://www.washingtontimes.com/news/...rgaining-chip/

China has recycled much of its trade surplus with the United States into U.S. Treasury and corporate debt securities. This policy increases demand for the dollar, raising its value higher than it otherwise would be. The policy also keeps the value of China's currency, the yuan, lower than it otherwise would be. That makes China's exports cheaper and more competitive, contributing to rising trade friction with the United States.
The composition of China's foreign-exchange reserves is a state secret, but most experts believe dollars account for 70 percent to 75 percent of the total.
Clearly, the United States is becoming increasingly reliant upon China to finance its budget deficit, which will likely triple this year, jumping from $162 billion in fiscal 2007 to nearly $500 billion in fiscal 2008.
The Treasury Department doesn't think that's a problem.
[...]

China's state-run media has begun expanding upon Mr. Summers' "balance of financial terror" metaphor by occasionally threatening to exercise China's "nuclear option." That is the explicit threat to dump massive amounts of dollars on world markets to turn the steady decline of the dollar into a complete rout.
That could force big increases in U.S. interest rates and push the economy into a prolonged recession, analysts say.
"China has accumulated a large sum of U.S. dollars," He Fan, an official at the Chinese Academy of Social Sciences, wrote last August in an op-ed in the state-controlled China Daily newspaper.

Mr. He's article appeared as members of Congress were demanding that China increase the value of its currency to reduce its trade surplus with the United States. "The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," Mr. He warned.
The dollar has declined about 25 percent since 2002 against a broad index of currencies of America's trading partners. Many economists, including Federal Reserve Chairman Ben S. Bernanke, believe the dollar's depreciation has contributed to the soaring price of oil, which is priced in dollars. Thus, among other unpleasant results, the "mass depreciation of the dollar" projected by Mr. He could cause oil prices to skyrocket and give American consumers reason to remember $4 gasoline as "the good old days."
Meanwhile, Xia Bin, finance chief at China's Development Research Center, was suggesting that China could use its foreign reserves as "a bargaining chip" to prevent a few "silly senators" from setting U.S.-Chinese economic policy.

[Supercilious]

Re: We have an oil bubble : the proof

Crude is down to $121 ...

When is the Martin Mayer interview going to be published?