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Fox Business News Appearance – Crude Oil Prices, Drilling Permits, and SPR

I was on Fox Business News a few months ago for “Street Fight.” You can see for yourself who you think was more prepared. (Hint: It wasn’t the other guy.)

The President had RENEWED drilling permits that had been put on hold, they were not NEW permits that would have ultimately lead to higher supply in oil.

— The oil market needs to have Frank/Dodd enacted to put a halt to HFT. We don’t need higher fees.
— Margins have been higher for investors forever. Margins are much lower for end-users.

President Obama has put the country in a much worse situation by drawing on the Strategic Petroleum Reserves (SPR), mostly for his political benefit. The last thing President Obama wants will be high gasoline prices coming into Election campaign season. Now should we have a real emergency on our hands, we have less “dry powder” because it was spent for political capital. That’s not leadership by any measure.

Like currency interventions, trying to bolster the near term supply will not affect distant prices, and tapping the SPR will fail. Moreover, higher prices in the deferred months encourage STORAGE – which takes supply AWAY from the cash market. Why? If the front months are lower than the deferred months in the commodities calender, owners of physical crude oil are encouraged to store the crude oil now to obtain higher prices later.

The long-term drop in demand for crude oil will come from tax credits for alternative energy sources, approving near-term crude oil drilling permits, and most of all, conservation by Americans. That’s how President Obama can create an national energy policy that is efficacious now and for future administrations.

The market premium in crude oil prices above the factors of supply & demand is determined by global forces…not a central bank, nor some mystical commissar. The futures market is not supposed to be based upon supply and demand, but the threats and dangers to global supply and demand.

When all the analysis is done, hedgers and investors affect the first function of the commodity futures market which is to transfer risk between themselves willingly. In the process, price discovery occurs, the second function of commodity futures markets.

The same argument can be made for any discount the market participants determine by their collective buying and selling. Market participants include buying and selling hedgers, and buying and selling investors.

For more insight from someone other than me, Reuters analyst John Kemp has written extensively on crude oil trading and the factors involved in the overall pricing mechanism.

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  • praetorian

    “We need to find money to fund inspectors to police the oil market”. As usual, people trying to blame somebody when something that we don’t like happens. The biggest speculators I have seen in the last 50 years: American, Spanish and Irish middle cases buying houses the couldn’t afford with 2% down payments and monthly payments of 50% of their income, this was somehow called investments, the fault? The Government or Goldman Sachs or anybody else except me (and I don’t want to imply these people are angels).

  • Twh

    Raising the margin requirements will only hurt the small investor. People are always looking for someone to blame. The answer is in the mirror.

  • Anonymous

    Investors already post 135% of that margin requirement that
    hedgers/commercials must post.

  • Jaytrader

    At this point, perhaps we should consider the UAW, CALPERS, the middle class. etc. as hedgers instead of speculators. Isn’t anyone who’s long a tangible commodity really just hedging against the systematic destruction and devaluation of the US dollar?!

  • Anonymous

    Probably

  • Ed

    Hi Martin,

    I just discovered your blog (through your Barron’s article) – great work!

    My blood boils when the government types blame speculators for high prices of oil or anything.  I am a small speculator myself trading commodities, currencies, indices, etc. and, yes, traded oil too (losing money in this case).  These government types need to understand that in the futures market a dollar made by one is a dollar lost by another – a zero sum game.  But most of all, they need to understand that the speculators are the counter party to hedgers – we take their trades.  Without us the market would dry like a bone in the Sun.