Thursday, May 29, 2008

Just a Little Bit ABout Oil

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David Frum, financial genius

Is David Frum just stupid, or did he leave out something important here?
Imagine that you're a speculator. You own a bunch of oil you bought at prices ranging from $75 to $125 a barrel. You are hoping that the price will go to $200. But nothing lasts forever; already Americans are driving less and switching to more efficient cars. A recession in the United States would slash Chinese export earnings and slow the growth of the Chinese automobile market. As the U.S. and Chinese economy weakens and oil consumption dips, the price of oil begins to soften. It dips back below $125, then $120, then $115. As a speculator, you've lost money on your last purchases, yet you could still score a huge profit on the earlier ones if you act fast. But uh oh: your competitors have the same idea. You all rush for the exits at once and after a year of frenzy on the buy side, it's pandemonium on the sell side.
OK, let's say I am a hedge fund guy, and I bought a bunch of oil a year ago. Where is it now? Oil is not stocks or foreign currency. It's stuff. To hold it, you have to store it in tankers or tank farms. Which is costly and difficult, especially if you aren't, you know, actually in the oil business. Does he really think there are a bunch of hedge funds, insurance companies, and pension funds with enormous stocks of oil sitting in tanks somewhere?

Maybe Frum was talking about futures positions in oil. But it sure doesn't sound like it.

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