ANTIESTABLISHMENTARIAN

With this article I will revisit the “oil speculators” straw man of the last month or so. Aside from what it says about those who advanced this excuse for the five-fold increase in the price of oil since 2002, it is interesting in yet other ways. And I will tell you why you should hug a hedge fund manager (assuming that he doesn’t have any of your money).

Wednesday’s International Energy Agency (EIA) Medium Term Oil Market Report went a long way to put a match to the straw man, whose remains have gone up in a flash and smoke, by saying that the price rise was justified by market fundamentals. For those who understand futures markets, this was obvious. Okay, so what about our now infamous “speculators”?

What amused me most about the political ruse of “speculators” was what I predicted would be the outcome for the hedge funds and ETFs that sought to make a killing in the oil market. First of all, the purpose of futures markets is to stabilize prices of volatile or cyclical commodities. Over the medium and long term, futures smooth out the price and facilitate price discovery. It is also used by the industry producers to hedge against large price changes. With this in mind, it is ludicrous to believe that amateur speculators, ie aforesaid hedge funds and ETFs could go up against industry professionals and beat them at their own game. The oil industry professionals are insiders with insider information, whereas hedge fund managers are hot shots who think they know everything, but don’t. That so many of them end up in the clink says a lot.

Bad news is slow to seep out of Wall Street, where bad news is treated as though it never happened. Over the last month or so rumors have been seeping out that a lot of hedge funds were loosing money faster than their banker friends have lost money. The rumor mill has now turned into a torrent of verifiable and massive losses, as investors are now calling their lawyers because their once golden-boy fund managers have refused to allow them to withdraw their money which the managers have managed to loose. Translation: many funds are, or are nearly, bust. When investors start making withdrawals this is as bad as runs on a bank. Once it starts it never stops and it’s lights out time.

Of course I can’t point to any one hedge fund and say those fools lost their oil market bets; we don’t know who they are. But these hedge funds aren’t all hemorrhaging cash as a result of making a killing in the oil market. No, its because they got killed. We know this because of the large volume of shorts that were undoubtedly placed by funds betting that high prices were not sustainable, as Wall Street is fond of telling us. Would an oil producer sell short? Of course not; they know that there’s an oil shortage and which direction the price is going.

So now you know why oil producers and oil companies never tell the truth about oil supply. If they did, they wouldn’t be able to hedge against future price changes if speculators have the same info that they do. This also brings to mind the blizzard of announcements by Saudi Arabia and OPEC over the last several months, all claiming that they were upping production. Increased production would mean that the price would fall, and so the hedgies all placed their bets, shorting the price . . . . and got creamed when the price kept right on going up because OPEC couldn’t increase production. And so we also now know how refineries have managed to keep up production and inventories despite very low price margins. They’re making up the difference by hedging. And guess who’s paying the bill? Yep, our straw man speculators.

You should thank the speculators for helping to keep the price of gasoline down. They have been doing the exact opposite of what they have been accused of doing.