Ah the commodities futures market ... a place where supply and demand come together, leading to market clearing prices based on good old fashioned economics. Not. [Jan 11, 2009: 60 Minutes - Speculators and Oil]
A couple interesting tidbits from this piece. First, it continues to show commodity prices are as much a function of speculative bets as they are of 'supply and demand'. We saw this in 2007 to mid 2008 when apparently every hedge fund and investment bank were levered to the gilt and supply and demand took hard and soft commodities on runs never seen before. Second, a relative small amount by financial oligarch standards (half a billion) can move markets significantly. Third, if one man can do this can you imagine what a firm (such as one that rhymes with Moldman Machs or Maybee Porgan) wants a price at a certain place to end a trading day, do you think it would be that hard? (might help explain those 100% winning quarters!) Fourth, what kind of system of global checks and balances do we have when 1 soul can move prices like this. Fifth,... well I could go on, but I've aired these grievances in the past. It's talking to the wind - ironic as 'financial regulation' is in its final stages.
But the next time you see futures surge 0.8% overnight out of the blue or oil charge $1.50 at 3 AM, just remember it's supply and demand. (wink wink)
- Britain’s financial regulator disclosed on Tuesday that Steven Noel Perkins, a former oil futures broker, single-handedly engineered a jump in the price of oil a year ago and cost his firm millions of dollars with a string of unauthorized trades after a weekend of heavy drinking.
- Mr. Perkins had just returned from a liquor-soaked golf weekend with colleagues in June of last year when he sat down in front of his laptop at his home east of London and started to place bets on Brent crude futures, according to a report by the Financial Services Authority. He continued to drink and place bets through the night, and by the morning of June 30, Mr. Perkins had placed more than $520 million worth of trades, at one point pushing the price of oil to $73.05, an eight-month high. The trades by Mr. Perkins were the main reason the price gained about $1.65 a barrel in just over two hours in the middle of the night, according to the report.
- “Mr. Perkins’s explanation for his trading on 29 and 30 June is that he was drunk,” the F.S.A. said. “He claims to have limited recollection of events on Monday and claims to have been in an alcohol-induced blackout at the time he traded.” When a back-office clerk called Mr. Perkins at 7:45 a.m. on June 30 to ask for details about the trades, Mr. Perkins lied and said he made them on behalf of a client.
- But by 10 a.m., PVM, where Mr. Perkins had worked since 1998, had discovered that his trades were unauthorized and suspended his access to the trading system. The trades cost PVM almost $10 million, the company said last year.
It is one thing for JPMorgan to take the Fed's nearly free money to rent oil tankers across the globe to store oil, but quite another for levered up hedgies and investment banks to use the carry trade to drive corn, wheat, and other such foodstuffs to unprecedented advances circa late 07 to mid 08, causing instances of starvation in certain 3rd world countries (We had quite a few of those pieces on the blog 2-3 years ago) [Feb 12, 2008: Wheat is Being Ruined by ... what else... Hedge Funds and Speculators]
But no worries - as long as the rainmakers make their money by providing liquidity... it's all good. Thankfully early in 2010 we saw news that JPM and GS were busy buying up industrial metals storehouse capacity [Mar 5, 2010: Copper Demand Now Weak but No Worries - Goldman Sachs and JPMorgan on the Scene] to help make those metals dance to their own tune.... errr, provide liquidity.
- Traders say the bank decision will reshape the close-knit warehousing industry as Goldman Sachs and JPMorgan will control the depots where more than half of the LME’s registered stocks are held. The LME is the world’s largest metal exchange.