Saturday, April 22, 2006

I Love It When We Screw Ourselves

Let's say that you wanted to do a little something different this Christmas and give the gift of hydrocarbon. What you would do is contact your broker and buy one NYMEX Division light, sweet crude oil futures contract. Once the contract expired, you would arrange for delivery of your 1000 barrels of crude oil.

If you actually took delivery of the crude oil, you would be in the minority. Less than 1% of futures contracts are actually exercised. The remainder are simply offset by doing the inverse prior to expiration. For example, if you sell a future, it can be nulled by buying the same issue. Thus, supply and demand of the underlying commodity is only one aspect of the crude oil price. Crude oil prices are also dramatically affected by speculators who trade in the commodity futures. When more of these investors choose to buy oil futures than sell, the price increases independently of the actual crude oil supply. NYMEX crude oil futures closed at a record $75.12/barrel on Friday. An article by the AFP cites Qatar's oil minister, Abdullah bin Hamad al-Attiya:

Ghanem echoed similar comments made by Qatar's oil minister who blamed the record high oil prices of more than 75 dollars a barrel on "horrible" speculation and "geopolitics" than any objective shortage of supplies. "This frenzy is fabricated by speculators who are taking advantage of it in the most horrible way," Abdullah bin Hamad al-Attiya told reporters Saturday.

This opinion is also reflected by Adnan Shihab-Eldin, an OPEC official:

"This price rise occurred despite the fact that the market continues to be well-supplied," OPEC official Adnan Shihab-Eldin told a meeting of the International Monetary Fund's policy committee on behalf of the oil cartel."

Even the US Secretary of Energy Sam Bodman agrees that the markets are amply supplied and has stated that he won't request that OPEC increase capacity.

So who are these investors who are buying crude futures at a frenzied pace and consequently driving the price to new records? This article from Reuters makes it pretty clear:

U.S. oil has rallied about 23 percent this year on supply concerns and as investment funds seeking high returns among diverse assets poured billions of dollars into commodities. Funds stepped in again on Friday."It's turned around, and it seems to be related to the injection of capital that we believe is coming from pension and mutual funds," said Deborah White of SG CIB Commodities. "All week it has been like this, a cross-commodities rally."

Deborah White doesn't come out and say the phrase 401K plans, but I will. For example, here is an article from that touts the benefits of the Fidelity Strategic Real Return Fund. Of course, in the fund description they use vague terms like "commodity-linked notes" to describe their allocation strategy, but the prospectus (see section titled: Commodity Linked Notes and Related Investments) clearly states that commodity futures are fair game. You can find similar energy-sector mutual funds offered by most of the major mutual fund companies.

As the explosion in the stock market and in mutual funds of the last decade has been driven by 401K money (as opposed to some mythical economic orgy of growth), this brings us to an interesting conclusion: A significant portion of the money flowing into NYMEX and driving the price of oil futures sky high is ours. These high crude prices are used by oil companies to justify ratcheting the price of gasoline up and, which, consequently, earns them record profits. Personally, I've always felt that the 401k model of retirement planning was one of the greatest scams, by Wall Street, to ever to be foisted onto the American public. I've felt that their lack of accountability to investors makes them prime targets for manipulative practices. But even while wearing my finest tin-foil fedora, I never considered that our retirement funds could be used as a grape press to exact even more profit for the corporatacracy. Maybe I'll start believing in the "liberal media" when I read a story titled: "Your 401k May Be Why You're Paying So Much At the Pump."


At 12:17 PM, Blogger elcapitanhink said...

Insightful. In fact, if I wasn't standing in the middle of 10K pounds of freshly boxed bullshit (aka my entire material existence) rangling four hispanic gentlemen, I would have something better to say.

I get the distinct feeling that we're having our asses sold back to us, as enumerated in one of my favorite works of fiction, Fight Club.

I'm ready to be a space monkey, myself.

At 10:52 PM, Blogger Broadsheet said...

Stop being smart.

This makes my head hurt. I'd rather read about your aluminum thong.

PS I hate it when you're right.

PSS I sold the shares in Exxon, Philips and BP that I inherited from my grandmother. I bought shares in alternative and wind technology. My interest is running at 22% over the entire investment period.

Thanks Nana.

At 4:04 PM, Blogger doggerelblogger said...

How unsurprising that this fine and well-written post had two comments (now three), while the one featuring Winny the Pooh sheets and blow-up dolls has 20.

Mebbe everyone deserves what they get, eh?

At 9:36 PM, Blogger tfg said...

hink- I agree that we are the candle that's getting burned on both ends.

broadsheet-Ethical investing is a lot like virtuous hooking. I don't believe it can be done successfully.

doggerelblogger-This post got about the same number of hits as the others. Regardless, deserve it or not I certainly believe that we are going to get it and then some.


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