Saturday, July 30, 2005

Oil Prices and Speculators

I believe that, in today’s oil market, speculators do play an important role in determining the direction (if not setting) of the oil prices. Note that there is no supply constraint in paper trading.

First look at how many traders are active in NYMEX Futures (see CFTC site) and look how many long and short contracts there are and by type (commercial and non-commercial. Non-commercial ones are known as speculators). Who are these non-commercials?

While the CFTC reports show futures and options positions on the NYMEX, they do not reflect the OTC energy markets at all. This is still where a very big chunk for oil and gas trading takes place. Futures dominate short-term trading, while the OTC markets dominate the long-term energy markets. And who are the buyers/sellers at OTC? I don’t know.

1. The volume of crude oil traded in futures markets far exceeds the actual available volume. Only a very tiny amount is actually delivered. For example, over the 7 years that the December 2001 NYMEX crude contract was traded (5 billion barrels), only 31,000 barrels were actually delivered on these contracts. Approximately 150,000 contracts for WTI are traded daily on the NYMEX, representing a volume of crude almost twice the world’s daily production.

2. Unlike the NYMEX contract, the IPE contract does not provide physical delivery. Instead it tracks the Brent forward contract and employs cash settlements. IPE Brent Crude futures total volume for 2003 was 24,012,969 lots, up by 12% over the previous year. This amounts to about 66 Mb/d [see Pipeline Magazine of IPE]. Approximately 75000 contracts for Brent crude futures, representing 75 Mb, are traded daily on the IPE.

3. No OTC effect here. On top of this, following the introduction of electronic trading of the IPE Brent crude futures contract and securing the relevant regulatory approvals in Japan and Singapore, Intercontinental Exchange (ICE) has been able to connect its OTC contracts seamlessly to the IPE futures market. Consequently in May 2004, ICE launched two crude oil arbitrage contracts between Brent and both Dubai (Dubai EFS) and WTI. So, more place to speculate.

In sum, only in NYMEX and IPE futures, each trading day more than 3 times of daily world oil production is sold. And this is only the registered ones, and think of ACCESS and OTC trading.

Who are those speculators?

Hedge funds (used to rich peoples money but now money from private banks, pension funds and insurance companies go there too) (see WSJ, 21 Sept 2004 for some fund names, for example). Add to this pension funds.

Plus, Goldman Sacs now claims to be the world’s biggest oil trader. Most other global investment banks also have a commodities division that deals in oil. The oil majors who strive to hedge profitability against adverse movements in prices, are also major players. (The Times , June 3, 2004).

Add to this Barclays, Morgan Stanley and Goldman Sachs and ABN Amro.

And also Citigroup Inc, UBS AG, Switzerland.

The Board of Governors of the federal reserve System has adopted an amendment to regulation Y (bank Holding Companies and Change in Bank Control) that would permit BHC a) to take and make delivery of title to commodities underlying commodity derivative contracts on an instantaneous, pass-through basis b) to enter into certain commodity derivative contracts that do not require cash settlement or specifically provide for assignment, termination, or offset prior to delivery. Rules became effective August 4, 2003.

And add to these maybe oil companies, why not?

I think, futures markets should indeed be reconsidered. Maybe then we will know better what the real supply and demand is.

Oh yes, speculators don't set the contract price but they intensify a price movement beyond or below what the fundamentals warrant.

Friday, July 29, 2005

From Afghanistan to Venezula with Love

“In fact I did, but created a pretext and blamed on the others, finally achieved the first steps of what I wanted to do” type of politics is again on the rise after S-11 events. This new century I believe will witness more and more this kind of things.

My scenarios go like this:


Motive: Afghanistan is on a strategic gas pipeline route, Unocol couldn’t achieve what it wanted to do due to the resistance of Afghan government. The country must be controlled.

Playground: Prepare an organized attack on your own ground together with the help of Brits and Israelis but make sure to minimize the number of casualties. Material loss is not important.

Pretext: Identify the so called terrorists by taking into account of your next step. Islamic fundamentalists is a good one. Find a leader and make sure that you know him very well and worked with him in the past if possible. Osama, for example. Then point at the country where you supposedly believe he is living. You will definitely have a resistance. Use the media to convince your citizens and the world.

Select a nice title for your future operations: for example “war on terror.”

Attack the country: Gain control, establish democracy and make sure that the elected government supports you and even better promote a leader who is in your side, also make sure you have enough supporters in the parliament. Some American citizens or corporate partners or managers for example.

Gain power at home: Your ultimate aim could be Marshall Law. But wait, go slowly, scare people enough and pass some laws: Patriot act, for example.

Result: The country is the biggest opium producer in the world. The gaslines must get your approval. By using it as a leverage determined who will get what and from where.


Motive: Gain access and control of important oil and gas reserves and secure your position in the Middle East. Your fiat currency is in danger. Save it. Country must not be very powerful.

Playground: Iraq.

Pretext: A possible nuclear threat. A despot leader.

Select titles for operation: “WMD” “Operation Freedom”

Use media permanently. Try to get international support but do not care much about the outcome. At least you tried. Justify your action.

Attack the country: same strategy as before. If not very successful spread the religious and ethnic discrepancies. In the worst case, the country would split in parts and you could control at least one of them. Make sure that that part can deliver the subjects you determined in your motive.

Gain power: Increase military budget and reinforce your privileged position.

Result: Took control of upstream business. American companies get the cream of the cream. Dark clouds on dollar are gone.

BREAK: Organise some “terrorist” attacks in different parts of the world and make sure that Islamists are punched in the brains of the lay man as being the cause.


Motive: Same as before.

Playground: Your powerful ally. England, for example. Organise several attacks. Use the ones in ACT I

Pretext: The “terrorists” are not from the target country in the first few attacks. Start from general and end up with specific scapegoat. Connect to the dots slowly to the target country. Iran.

Select the title: “end with extremists”

Attack the country: You do not attack first. Your ally belongs to the European Union. It must get the support from them. In case there is no strong military support you go together with them. Note this, this one is a powerful country. You must bring as many support as possible.

Gain power at home and in international arena: You are winning the war on terrorism.

Result: Dollar is in better position. Oil and gas production and exploration is under your indirect control. Gave the messages to the other countries, they are good with you or at least cannot disturb you in the region.


Motive: Same as before. Wide spreading socialist ideas are treating your corporate power and the hegemony of dollar. Secure your energy supplies from a closer distance.

Playground: Latin America. One or more of your close allies.

Pretext: The communism is back. It is a danger to the good way of life and personal freedom. Target: Venezuela.

Select the title: “operation liberty”

Attack the country: Covert operations first, use as much paramilitary as possible.

Gain power at home and in international arena: You are the police of democracy and freedom.

Result: Dollar is safe. Oil and gas supplies are secured. Have a dominant power in the world and in the region.

PREPARE for ACT XIII. China. ACT IV to ACT XIII will make you again number one power of the world. You are establishing the biggest empire.

But make no mistakes. Any failure between ACT III to ACT IV will be your end.

This piece of writing was supposed to be half a page but became too long.

Tuesday, July 19, 2005

How Media Uses Statistics for Brainwashing

It was generally believed that media, as a trustworthy dissemination subsidiary of knowledge, is an independent source of factual information whose purpose is to inform public objectively about current issues based on widest possible range of opinions. Statistics science is a powerful tool in shaping this factual information. Unfortunately it might nowadays used by media as an invisible weapon to promote a particular point of view and to sound more convincing. Laymen, mostly being statistically illiterate or innumerate, simply accept the statistics reported in the news as if they are proven facts. And we witness these more and more on oil!

Most journalists make their stories based on press releases distributed by institutions. In general, reporters never bother themselves reading the original reports. This behavior is quite understandable given the immense amount of press releases and information they receive every day and the pressure they have to report the news as soon as possible, especially if the subject is hot.

Statistical mistakes may be made intentionally or unintentionally anywhere between creations of the numbers to final news. These mistakes can be in the forms of misuse, misinterpretation, mispresentation and even abuse. Since statistical information come from a trustworthy source and documented in widely recognized media, the public, in general, do not hesitate to believe and accept it passively. Once the statistics is widely accepted and believed to be true, politicians may use it actively. Consequently, it may get general acceptance.

This sort of data laundering around statistics endures because no one questions it and points out the flaws. Finally they may become a powerful invisible weapon in the hands of rules to pursue a hidden political agenda.

This is the new era we are living in. Nowadays oil prices are on top of the global agenda and media perfectly displays the use of this weapon in oil combat.

There are three types of statistics - the good, the bad and the ugly. Surprisingly the good ones do not get much attention whereas the bad and ugly ones mostly find their way to be hero.

For instance, we always see the following claim in media: "Iraq has the second largest oil reserves in the world with its 115 billion barrels, and Gulf region sits on two thirds of world oil reserves." Is that so?

Which source says so? Well, all the respected ones - BP Statistical Review? Oil & Gas Journal, World Oil?

Why do those journalists not mention that Iraqi oil reserves did not change over the past six years in those publications, and pretty much the same for almost all Middle Eastern countries over so many years? Ah yes, we should believe that those countries discover exactly the same amount of oil they produce every single year!

Why the figures in the US Geological Survey 2000, which say that there is more oil outside the Gulf than inside the region, are not mentioned? Why difference between reserves and resources are not explained? But no! They should not be questioned. They should only be used to be good servants they are wanted it to be in order to cover up their master’s agenda. Why is it a general tendency in the US to look for scapegoats only outside the US? Why to hide the fact that depreciation of the US dollar, US refining capacity and Wall Street are important reasons of the price hikes?

Why attack only OPEC on the grounds that its members do not extract enough oil while hiding the fact that the biggest oil exporter to the US today is Canada?

Instead of speculating about the situations outside the US why not speculate also who might be behind the oil price hikes and what their connection to the White House could be? But no! Manipulate the statistics, lie with statistics, twist the statistics and if not enough make up some statistics and present them as proof, evidence and fact.

We are persistently bombarded with numbers, statistics and twisted charts with no supporting real hard evidence. For example, do we really know how much oil does OPEC produce? Does even OPEC know how much its Members really produce? The numbers available out there are only the estimates or best guesses. Why not simply accept that recent oil price hikes have nothing to do with oil market fundamentals? Indeed, oil market fundamentals tell that there is excess supply of oil out there. And yet, oil prices are rising! And yet a fight around those numbers! High oil prices will hurt economic growth, especially the developing countries! IS that so? why they had the highest growth in 2004 then? Apparently the highest over the past 25 years, says the World Bank!

Meanwhile, gasoline prices in Europe are double the ones in the US and yet Europeans do not cry. Because American way of life is not negotiable ?

In a world where innumeracy and statistical illiteracy have been increasing, it is very easy for politicians through media to convince the people on the street by using numbers. It is time to wake up and think critically about what we read.

It should be us who draw the conclusions about what and why things are happening, how statistics are created and presented to support the views.

There are great journalists out there, and they should at least warn and train their colleagues. People should immune themselves against lies with statistics. In sum, it appears that statistics has already become an invisible political weapon.

This weapon now serves to the ones in power to be used for imposing the twisted information which is accepted and believed easily by the innumerates. We should stop looking at things by using only one of our eyes. We are given two of them in order to see the good and the bad together.

As Rod Serling said in the opening remark of the famous TV series The Twilight Zone "This highway leads to the shadowy tip of reality: you're on a through route to the land of the different, the bizarre, the unexplainable...Go as far as you like on this road. Its limits are only those of mind itself.” Welcome to statistical misreality.