Professor Elam

Thursday Feb 17 2011

A new book THe Asylum examines oil trading on the New York Mercantile Exchange. The Merc originally began by trading potatoes. The move to oil trading of has resulted in more oil traded on paper than in the real world. Prices reached a staggering $145 in 2008. As I observed this past weekend, now the energy service stock prices are still ahead of the oil price. And the Dow Transportation Index is trying to move higher. 

Oil was the last market to peak in 2008. We are watching various support levels below the mid $80s where oil has been trading. 

This author suggests there should at least be high margins to trade the contracts. 

In the video clip Rick Santelli defends commodity trading pointing out that all contracts expire against physical delivery, so there has to be some economic substance. Yes but it you think about it , this is the same economic substance we saw in housing in 2007. It was in the best interest of everyone in housing to get prices higher. The appraisers were paid by the mortgage companies, the mortgage companies made a percent of the dollar value of the loans, the realtors made more money as their fixed percent of the commission moved higher, the builders made more money as the price of the houses increased, the cities made more property tax revenue as the purported value of the homes increased, and so, the price spiral was to eeveryone's advantage. 

The same is true for oil. High prices were the justification for the XOM CEO to retire with a fat $400 M retirement package.  Even as XOM admits it is not finding oil, the price of its stock has risen from 62 to 82, perhaps all the oil being found is on the NYMEX, eh?

We will study derivatives in Intermediate II, I suggest you pay more attention to these developments.