Tuesday, July 7, 2009

Oil Futures: It's Not Manipulation, It's Stupidity

Bravo, Cramer! On Mad Money show today Jim at last agreed that oil futures market doesn't reflect oil supply/demand picture. He thinks it's manipulation. I don't agree. Thing is, future market became a way of investing for a lot of institutions. Organizations, which you can't call manipulators, like State of California pension fund or Harvard endowment fund, are investing a lot of money into commodity futures. They invented for themselves a new asset class and invested hundreds of billions.

There is one fundamental problem with the futures: they are not a real product. They are just pieces of paper. And when volume of futures becomes high enough, and traders on the market have no relation to particular commodity production/consumption/trade, prices of futures don't reflect supply/demand of a real product. They reflect only supply/demand of the futures themselves. As a result, we had last year's boom/bust situation in oil futures. And it looks like this situation repeats right now, on a smaller scale. Tail wags the dog.

Government regulation exists on all markets. It's ridiculous to think that it shouldn't exist on the markets of commodity futures. Kudos to CFTC for looking at the regulation at last.

One note to Jim Cramer (no, he is not reading my blog, I'm sure): oil is not alone. Most of commodity future markets separated themselves from real products. I can't even imagine all consequences of coming regulation.

Last, but not least, a note to "investors" in commodities. Stop right now, before you destroyed even more capital. Paper speculation destroys capital of most participants. Investing in commodity futures is not wisdom, it's stupidity.

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