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Do not fool yourself into thinking that you know what the price of a commodity should be.
- Phil Flynn |
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Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn.
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Today's Featured Article
Once again it is time to blame the messenger as the free markets and oil comes under attack. The greatest way to get a fair price for oil devised by the mind of man is getting reviewed by the CFTC as they try to determine whether or not the Federal government should reduce liquidity in the futures market by reigning in speculators. Now it is not just the US but governments across the globe are blaming speculators for the volatility in prices as opposed the real culprit the nation's financial crisis. They see the speculators as the cause of the crisis but in reality they are the effect. The Wall Street Journal reports that "policy makers on both
sides of the Atlantic launched an effort to crack down on what they called speculation in oil markets, underscoring concerns that a sharp rise in oil prices could worsen the global economic downturn."
The Journal says that "the moves come at a time when the hotly debated idea that speculative investors are driving up prices is gaining credence, and political momentum is building to stop them. In recent months, oil producers and Asia's biggest oil-consuming nations have called for regulators to address the issue of price volatility, and the U.S. Senate has blamed speculators for high commodity prices."
Yet by reigning in speculators you will not reduce volatility you will increase it. The moves in oil while unpleasant were necessary to be played out in the backdrop of the greatest financial crisis since the great depression.
You see oil was not the only market to make wild swings. We saw incredible moves in the Forex market in the euro and the dollar. We saw historic swings in the stock market and the yield curve. Are you telling me that if we did not have speculators in the oil market that there would not have been swings in oil?
In fact as I have said before the price of oil has been volatile throughout history even before the speculators had anything to do with it. I know it is amazing to some of you to find out that prices move whether or not there is a speculator involved. Volatility in the price of gas and oil moved up and down long before we had automobiles.
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Yet when prices do what some do not want them to do people play your fears and anger by misleading the public. They make lot of false and misleading allegations with no basis in fact and the sad part is the public believes it. Instead of educating the public to the realities of the global oil market we feed on fear, prejudice, myth and legend. Politicians and political action groups feed on the ignorance of the public because it furthers their political agenda. They either lack knowledge or it is just willful neglect of the facts.
Let me be clear. When you hear that speculators in the futures markets are the only reasons oil and gas prices are going up you are either being lied to or the person telling you that lacks the basic understanding of all of the elements that drive price. Let me say that again. If someone is telling you that speculator's in the futures markets are the only reason that gas prices are going up, you are either being lied to or the person telling you that lacks the basic understanding of all of the elements that drive price. In other words some are liars and others are just misinformed.
I mean who are these people that think that they have some type of divine wisdom that makes them think that they know what a fair price for oil or gas should be. Why are they smarter than the global market place? To these people honestly believe that if we banned futures trading in oil those prices would somehow magically be lower??? Because if you want to take speculation out of the market place you will have to go a lot further than getting rid of their futures markets. You will have to control not only the price but every buyer and seller producer and user across the globe. You would also have to have the power to control the rate of exchange between every country on the globe. And
while you're at it you will have to control the weather and guarantee peace on earth. Then maybe just maybe you can tell me what a fair price for oil should be.
People with a narrow focus of what they think the fundamentals are probably not taking into account all the fundamentals. There is no oil price fairy that sits around dictating oil prices. What refiners pay for oil on the global market and what you pay for the gas at the pump is determined by a multitude of complex factors that can be influenced on a day by day even minute by minute basis. The critics point to high supply and weak demand as evidence that oil should be going down in their narrow minded worldview. To what price is fair is a question that they cannot answer. Ask any of them and they all have a different answer. It seems that the critics that think they know what prices
should be can't decide what is fair. Those that blame the speculator for the increases in oil live in their own little world that is a different place then the real world that we all have to live in. This myth that anytime oil or gas prices do whatever you do not want them to do, that they are somehow being manipulated, is hogwash and a danger to the US economy. This country needs to wake up to the realities of what these higher prices are saying about the economy and the consequences of our actions. The American people have to understand the very real impact of government and the Federal Reserve policies. They have to know that there are no free lunches when it comes to fixing the
economy. They have to know that you cannot run astronomical budget deficits and just print more money without it not having an impact on commodities especially the price of oil.
And guess what. If the Green shoots do not work then prices will come down and that appears to be happening.
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The same guys that brought you the economic stimulus plan in Washington that was that was supposed to create jobs are the same guys that are telling you that oil speculators are to blame for our problems. The truth is that action and inaction by the US Congress has more culpability for high oil prices then the oil speculators. They help create the environment that help lead to this historic oil price volatility. They help create the conditions that led to the greatest financial crisis since the Great Depression.
The problem is the world has lost confidence in the US congress that has run of a record budget deficit. They have lost confidence in our dollar as the Federal Reserve went to quantitative easing printing more money to keep our economy from the brink of collapse. When you do that you find that other countries will seek safe haven in oil. And it would be happening even if there were no oil futures market to hedge with. China, Brazil, India and Russia have called for a new currency to replace the dollar... And why wouldn't they? They own a lot of them.
Now when the Chinese bought billions and billions of dollars of our debt they were expected to be paid back in dollars, they did not expect that our government would be paying them back just by running a printing press. When they bought our debt they did not expect to be paid back in dollars that are not worth as much.
Do you think that China would not be diversifying away from the dollar even if the futures markets did not exist? Take this Financial Times story from a while ago that says that, "Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar. Do you not think that this would be happening if the dollar was strong? Would this happen if we closed down the futures markets? Of course it would.
Oil is gone higher because of rising demand expectations and is falling on reduced demand expectations. Oil is rose due to seasonal factors and now is falling due to seasonal factors. Oil is increased because the dollar was weaker and it falls when it gets stronger. Oil is rising because of the effect of quantitative easing and fill fall if the market looks beyond that and feels the need for more of a quantitative drug. . Oil increased as countries and investors are diversifying themselves away from the dollar. Oil increased because OPEC is cut production. Oil increased as billions of dollars of oil projects got cancelled. And that is just some of the reasons. So don't believe the lies,
misinformation or the ranting of the uniformed. Look at the big picture.
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About the Author
Phil Flynn
is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.
Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's accurate and animated
forecasts, analysis, speculative and hedging opportunities. |
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Special Message from Our Author
Get daily research letters from Phil Flynn of Alaron Energies
Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn.
Learn more about this complimentary offer and sign-up today. |
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