Michael Masters has created a stir in recent months with his pronouncements over the energy markets. The religious like fervor in which commodity bulls exhibited as recently as June is long gone, and the entire complex has gone...poof!
Masters broke down the numbers on oil futures trading, although it is far more complex than that, and ignores the swaps markets:
An independent study of oil markets concluded that speculation by large investors was a primary reason for the surge in oil prices during the first half of the year and for the more recent price declines.
According to the study, investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel. Since then, investors have withdrawn $39 billion from those same markets as prices have retreated.
Michael Masters of Masters Capital Management, which did the study, said the flow of money - not major changes in supply and demand - caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation. Fortune
Walter Lukken, the chair of the CFTC, is fighting for the agencies very survival, and of course poo-poo’s Masters’ conclusions:
“Just as weather forecasters have no effect on the weather, energy speculators have no effect on the price of oil,’’ Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents investors, told Bloomberg. “His fallacy is that he ignores the laws of supply and demand, which determine the price of oil.”
Masters says he extrapolates his numbers from publicly available agricultural data to arrive at overall numbers that include oil futures investments. Earlier this year reported that index speculators such as those that trade on S&P’s GSCI accounted for $260bn of assets, up from $13bn in 2003. As of Sept 2 that number was down to $223bn, noted Bloomberg.
Whatever the case, in arguing for legislation, lawmakers, primarily Democrats will point to the Masters report and an MIT report released In June alleging that speculation caused the rise in energy prices, Bloomberg adds.
And after the CFTC’s report Thursday, regulators may require Wall Street banks to regularly disclose their energy futures positions connected to the unregulated swaps market, according to people familiar with the discussions, suggests Bloomberg:
JPMorgan, Goldman Sachs, Barclays and Morgan Stanley control 70 per cent of the commodities swaps positions, and swaps dealers are the largest holders of Nymex crude oil futures contracts, Masters says in his report. “These large financial players have become the primary source of the recent dramatic and damaging price volatility”.
Of course, Masters has been long airline stocks throughout this entire drama, talking his book to some extent. But the bloom is off the rose; the decline in commodities has been vicious.
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Study blames speculation for oil’s rise
Fortune
Oil price speculation: Masters back on the attack
FT
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.
Master’s is a broken clock. Oil producers hedging production are far more important factors in the marketplace than a few highly leveraged hedge funds. As Paul Tudor Jones once famously said, “the market is going to go where the market is going to go.”
I had never heard of Master’s until late May
http://tinyurl.com/5jcn5y
where he pointed out that commodity related hedge funds had gone from $13 billion to $260 billion.
Ospraie’s flagship is dead, Red Kite lost 40% in August, RAB is gating people and much more news is to come.
The positions in Atticus’ last 13-F filing lost roughly $600 million yesterday, but some people are not buying into the argument.
Maybe Master was right for the wrong reasons, but oil has been smoked and natural gas has been annihilated.
From my perspective Masters has not been arguing this long enough to be a broken clock given it has only been 3-4 months since he arrived on the scene.
I don’t trust the CFTC’s calculations of hedgers vs speculators...they are a joke.
sj
How about this quote from Paul Tudor Jones:
“Commodities have been the worst-performing asset class behind stocks, bonds and real estate for the past 200 years, but Wall Street doesn’t highlight that long history when selling commodity index instruments today. Instead, it shows a chart of the bull market of the past 12 years to rationalize why some pensioner should be long cattle futures in the derivatives markets as part of a basket. I am sure they were using similar logic about tulips three centuries ago. Oil is a huge mania, and it’s going to end badly.”
* The Alpha Hedge Fund Hall of Fame: Paul Tudor Jones II
* Alpha Magazine / Institutional Investor
* June 2008
http://www.iimagazine.com/Article.aspx?ArticleID=1964189
yes i flagged the alpha piece when it came out
http://tinyurl.com/58b26z
I did not expect crude to unravel so quickly, but clearly there was some froth in the market.
The unwind is another crazy chapter in a tape that continues to make my head spin…
http://tinyurl.com/64rgxc
http://tinyurl.com/57dtc4
Masters is either willfully or ignorantly distorting participation. Take a look at his plot on page 1 of the 9/10/08 report.
http://accidentalhuntbrothers.com/
Why does the curve get smooth after 7/15/08? Answer: he’s extrapolating a trend and the trend he’s fitting is not participation in futures markets, its the price.
Notice his report continually uses notional value, essentially price times quantity. Well if price falls so does notional value. So his “finding” is that if you multiply price times quantity you get a curve that closely matches the price line (it helps too that quantity doesn’t change much).
Wow.
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