Is Wall Street Responsible for 2008's Oil Bubble?

Tuesday, January 20th, 2009

Back in late June, we [GreenLightAdvisor.com] inter­viewed Stephen Briese, a sea­soned com­modi­ties trader, who, based on CoT (Com­mit­ments of Traders) reports, pub­lished reg­u­larly by the CFTC, posited that there was an esti­mated 200-days of paper oil held by investors/speculators, among them some of the large endow­ments and pen­sion funds, as well as sov­er­eign wealth funds re-investing their oil prof­its back into none other than the paper stuff. Briese is the author of The Com­mit­ments of Traders Bible.

Is Wall Street to blame for 2008's oil bub­ble? Steve Kroft, from CBS' 60 Min­utes inves­ti­gates:
Click play to watch the CBS 60 Min­utes story aired on Jan­u­ary 8, 2009. This is a must see story.

Dan Gilli­gan of the Petro­leum Mar­keters Asso­ci­a­tion says it is naked futures investors via indexes that are more inter­ested in invest­ing in paper oil for profit.

As the pres­i­dent of the Petro­leum Mar­keters Asso­ci­a­tion, [Dan Gilli­gan] rep­re­sents more than 8,000 retail and whole­sale sup­pli­ers, every­one from home heat­ing oil com­pa­nies to gas sta­tion owners.

When 60 Min­utes talked to him last sum­mer, his mem­bers were get­ting blamed for goug­ing the pub­lic, even though their costs had also gone through the roof. He told Kroft the prob­lem was in the com­modi­ties mar­kets, which had been invaded by a new breed of investor.

"Approx­i­mately 60 to 70 per­cent of the oil con­tracts in the futures mar­kets are now held by spec­u­la­tive enti­ties. Not by com­pa­nies that need oil, not by the air­lines, not by the oil com­pa­nies. But by investors that are look­ing to make money from their spec­u­la­tive posi­tions," Gilli­gan explained.

Gilli­gan said these investors don't actu­ally take deliv­ery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."

"They're try­ing to make money on the mar­ket for oil?" Kroft asked.

"Absolutely," Gilli­gan replied. "On the volatil­ity that exists in the mar­ket. They make it going up and down."

Hedge fund man­ager, Michael Mas­ters says that for every bar­rel of oil actu­ally con­sumed in the US, there were 27 bar­rels traded every day, and inter­est in com­modi­ties indexes grew from $13-billion to $300-billion in 5 years.

About the same time, hedge fund man­ager Michael Mas­ters reached the same con­clu­sion. Mas­ters' exper­tise is in track­ing the flow of invest­ments into and out of finan­cial mar­kets and he noticed huge amounts of money leav­ing stocks for com­modi­ties and oil futures, most of it going into index funds, bet­ting the price of oil was going to go up.

Asked who was buy­ing this "paper oil," Mas­ters told Kroft, "The Cal­i­for­nia pen­sion fund. Har­vard Endow­ment. Lots of large insti­tu­tional investors. And, by the way, other investors, hedge funds, Wall Street trad­ing desks were fol­low­ing right behind them, putting money — sov­er­eign wealth funds were putting money in the futures mar­kets as well. So you had all these investors putting money in the futures mar­kets. And that was dri­ving the price up."

In a five year period, Mas­ters said the amount of money insti­tu­tional investors, hedge funds, and the big Wall Street banks had placed in the com­modi­ties mar­kets went from $13 bil­lion to $300 bil­lion. Last year, 27 bar­rels of crude were being traded every day on the New York Mer­can­tile Exchange for every one bar­rel of oil that was actu­ally being con­sumed in the United States.

There were no dis­rup­tions to sup­ply, and India and China did not sud­denly increase their con­sump­tion overnight. In fact, sup­ply was ris­ing and demand falling.

Michael Green­berger, a for­mer direc­tor of trad­ing for the U.S. Com­mod­ity Futures Trad­ing Com­mis­sion, the fed­eral agency that over­sees oil futures, says there were no sup­ply dis­rup­tions that could have jus­ti­fied such a big increase.

"Did China and India sud­denly have gigan­tic needs for new oil prod­ucts in a sin­gle day? No. Every­body agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from some­where in the 60s to $147 in less than a year. And we were being told, on that run-up, 'It's supply-demand, supply-demand, supply-demand,'" Green­berger said.

A recent report out of MIT, ana­lyz­ing world oil pro­duc­tion and con­sump­tion, also con­cluded that the basic fun­da­men­tals of sup­ply and demand could not have been respon­si­ble for last year's run-up in oil prices. And Michael Mas­ters says the U.S. Depart­ment of Energy's own sta­tis­tics show that if the mar­kets had been work­ing prop­erly, the price of oil should have been going down, not up.

"From quar­ter four of '07 until the sec­ond quar­ter of '08 the EIA, the Energy Infor­ma­tion Admin­is­tra­tion, said that sup­ply went up, world­wide sup­ply went up. And world­wide demand went down. So you have sup­ply going up and demand going down, which gen­er­ally means the price is going down," Mas­ters told Kroft.

Invest­ment banks fuelled the energy market.

Mas­ters believes the investor demand for com­modi­ties, and oil futures in par­tic­u­lar, was cre­ated on Wall Street by hedge funds and the big Wall Street invest­ment banks like Mor­gan Stan­ley, Gold­man Sachs, Bar­clays, and J.P. Mor­gan, who made bil­lions invest­ing hun­dreds of bil­lions of dol­lars of their clients’ money.

"The invest­ment banks facil­i­tated it," Mas­ters said. "You know, they found folks to write papers espous­ing the ben­e­fits of invest­ing in com­modi­ties. And then they pro­moted com­modi­ties as a, quote/unquote, 'asset class.' Like, you could invest in com­modi­ties just like you could in stocks or bonds or any­thing else, like they were suit­able for long-term investment."

Its an impor­tant infor­ma­tive piece of jour­nal­ism. Make sure you watch it, in case you missed it.

Tags: Briese, Cbs 60 Minutes, Cftc, Commitments Of Traders, Commodities Trader, Emerging Markets, Endowments, Futures Markets, Gas Station Owners, Gilligan, Home Heating Oil, India, New Breed, oil, Oil Companies, Oil Contracts, Oil Profits, Pension Funds, Petroleum Marketers Association, Speculators, Steve Kroft, Volatility, Wholesale Suppliers
Posted in Bonds, Commodities, Emerging Markets, Energy & Natural Resources, Gold, India, Markets, Oil and Gas | Comments Off

Warren Buffett Interview (01/19/2009)

Tuesday, January 20th, 2009

War­ren Buf­fett is inter­viewed by Tom Brokaw, Jan­u­ary 18, 2009, on Date­line NBC.

Click play to watch:

Here is an excerpt from the transript:

For the com­plete tran­script, click here.

TOM BROKAW, NBC NEWS:

Last fall, War­ren a poll­ster told me that the elec­tion was between hope and fear. When it comes to the econ­omy, who's win­ning, hope or fear?

WARREN BUFFETT:

Well, right now fear is. I mean, you're see­ing it every­place. You saw it at– in the sales of almost every item at– at Christ­mas. There's a lot of fear through­out the coun­try. Even– even with peo­ple whose jobs are fine, and who have money in the bank. But they– they're worried.

BROKAW:

I've been describ­ing this as the domes­tic equiv­a­lent of war. Is that an overstatement?

BUFFETT:

Well, actu­ally, in Sep­tem­ber I said– this is an eco­nomic Pearl Har­bor. I– that was the time con­gress had made it in. It really is an eco­nomic Pearl Har­bor. It– the– the coun­try is fac­ing some­thing it hasn't faced since World War II.

And they're fear­ful about it. And they don't know quite what to do about it. And the point is– and– and it– and tem­porar­ily it looks like we're los­ing. It has that– that same aspect. Inter­est­ingly enough, we were los­ing for a while after Pearl Har­bor. But the Amer­i­can peo­ple never doubted that we'd win. I mean, we had that atti­tude then. I think, right now, that they're sort of paralyzed.

BROKAW:

Is Barack Obama the right com­man­der in chief for the economy?

BUFFETT:

He's the absolute right com­man­der in chief. That– you know, that's another thing the Amer­i­can peo­ple seem to do, occa­sion­ally, is that we elect peo­ple that are right for the times. You know, whether it was Lin­coln, Roo­sevelt. And– and I would say Obama– you– you couldn't have– any­body bet­ter in charge.

BROKAW:

But why is he right for the times?

BUFFETT:

Well, he's– he– he's smart, he's got the right val­ues, but he also– he under­stands eco­nom­ics very well. He's cool. He's– he's– he's ana­lyt­i­cal. But then, when he gets it all thought through, and he's fast– he can con­vey to Amer­i­can– the Amer­i­can peo­ple what needs to be done. Not to expect mir­a­cles. That it's gonna take time. But that we're gonna get to the other end. And– and I– I– I don't think there's any­body bet­ter for the job than– than– the president-elect.

BROKAW:

He often cites you as an advi­sor. And I know that you've been in touch with his eco­nomic team. But what often hap­pens to some­body who gets elected to that office, par­tic­u­larly, they're more to you to tell you what they know than they are to lis­ten. Does he listen?

BUFFETT:

He's a lis­tener. I– I first met him, maybe, four years ago, or some­thing like that. He was a lis­tener then, he's a lis­tener now. But, on the other hand, he makes up his own mind. He will– he will not be– his team won't run him. He'll use his team, he'll use them very effec­tively. He'll syn­the­size, he'll– he'll– he'll ana­lyze. But, in the end, it'll be his decision.

Tags: Attitude, Barack Obama, Commander In Chief, Dateline Nbc, Economics, Economy, Excerpt From, Hope And Fear, Lincoln, Money In The Bank, Nbc, Nbc News, Overstatement, Pearl Harbor, Pollster, Roosevelt, Time Congress, Tom Brokaw, Warren Buffett, World War Ii
Posted in Economy, Markets | Comments Off