Open thread Jan. 19, 2016 Dan Crawford | January 19, 2016 7:05 am Tags: open thread Comments (5) | Digg Facebook Twitter |
i posted this graph in my fracking newsletter and tried to explain it:
even i was amazed at the degree of financialization in the commodity markets…
here’s what i ended up with:
while we’ve got that chart up, we’ll look at a few other things that it shows us…on the top, we have CLG 16 or CL 1, identifiers of the oil contract being traded, with CL the exchange symbol for us WTI oil and 1 being the first or front month contract, the one which is typically quoted when the financial press talks about the price of oil; next to that, we have trading volume: 899566, which is the number of contracts that changed hands on Friday, the most recent day on the chart…likewise, across the bottom, we have red and green bars for each trading day of the last 3 months, which graphically shows the number of contracts that traded each day, with red indicating trading on a day when the price for this oil contract was down, and green representing trading on a day when the price for this oil contract was up, as indicated by 1000000 and 2000000 on the margin, indicating trading volume of 1 million or 2 million contracts…now, here’s the thing; each of those contracts represents the a trade of 1000 barrels of oil, meaning that on Friday, when 899,566 contracts changed hands, rights to 899,566,000 barrels of oil were traded; similarly, when 1,289,527 contracts changed hands on Thursday,1,289,527,000 barrels of oil were traded…hence, since nearly 6 million contracts for February oil were traded at the NYMEX this week, that represents net trades of electronic contracts that had claim to 6 billion barrels of oil…that sounds like a lot of oil, and it is; if you’ve been paying close attention to the EIA stats we review most every week, total US oil production has been running at about 9.2 million barrels per day; that means daily oil trading for just this one oil contract in New York has been more than 100 times the amount of oil we produce daily over the past week…likewise, the amount of oil that we’ve had stored at Cushing and various other depots around the country has been running between 450 million and 480 million barrels over the past several months; that means daily oil trading for just this one contract in New York has typically been more than twice the oil that exists anywhere above ground in the entire country…but while one contract may be swapped electronically several times a day, no physical oil ever changes hands in this strictly financial market, which is where oil prices are actually set; when a fracker starts to drill, he’ll typically hedge by selling his future output through such an exchange, just as the price the refinery pays for oil is set by this market…and this is just one contract at one main exchange; there are dozens of less active contracts and less active exchanges, including those in Europe, where similar volumes of oil contracts are traded….so whatever we might say about the oil companies, they are at least getting their hands dirty while making a living off of the dirty oil products we use; at the same time, there are these other bottom feeders at market monitors in New York who do nothing but swap electronic oil, who nonetheless still manage to get very rich between the time the oil comes out of the ground and the time it’s delivered to a refinery to make the products that we use…
Are physicians moving toward unionization? http://www.nakedcapitalism.com/2016/01/not-going-to-take-it-anymore-doctors-in-the-pacific-northwest-unionize.html
RJS – You’re surprised by the high volume in crude futures? Don’t be. High volume always comes with high volatility.
You remark on the 900m of barrels traded on a day last week. At the time crude was around $30. So the total trading came to $27B. By comparison FX trading comes to $5.3 Trillion a day (200X crude) , and on a quite day the US treasury market does about $3/4 trillion (30Xs crude) . So oil is a small fraction of what broad market turnover is on a given day.
A question, do you have a fundamental problem with a transaction between a Canadian oil producer selling futures to lock in the value of their production, and on the other side a refinery in the US who uses millions of barrels of crude to make gas and similarly wants to hedge the cost of production? I hope not. Hedging is an important part of an efficient company.
There has to be intermediaries and risk takers to manage the supply and demand that exists. Turnover falls significantly when there is no price change. It rises when the risk increase.
And there are plenty of risks. You end your piece with a shot at the fat-cats who get rich on taking on risk. You couldn’t be farther from the truth on that.
Look up: “losses from falling commodities prices”. The numbers are staggering. hedge funds, commodities firms, private individuals, mutual funds, oil companies of all kinds and their shareholders and bondholders.
$trillions in wealth has evaporated in just the past few weeks. Countries are teetering – even states like Alaska and Texas are hurting.
The 70% drop in crude has created one of the largest wealth transfers in history. The money has flowed from the risk takers to consumers. Be happy with that result.
Socialist — Just and added tidbit on the American Medical Mess (AMM):
bruce, nope, i have no trouble with hedging your production or locking in the price of your inputs, or even with the function that the futures market performs…
you did read me right though; i did take a shot at the fat cats who get rich in oil without getting their hands dirty…i’m sure i didn’t hurt them, though..