Flickr

  • www.flickr.com
    Abiola_Lapite's photos More of Abiola_Lapite's photos

« Atheists America’s Most Distrusted Minority | Main | A Bad Day for the New York Times »

March 26, 2006

Comments

L

As I said before, I think the futures markets are terribly wrong--too high--but I'm not investing in them because long term futures markets are about psychology and have nothing to do with comodities: it's easy to lose everything while being right. Options are safer, but I'm told they don't really exist.

Another reason I'm not betting on the price of oil, but which doesn't apply to the peak oilers, is that I think oil companies are pretty stupid. They're probably right that investing in rent-seeking is usually more efficient than oil-seeking, but I think they're really overdoing it given current oil prices.

Wayne

L, are you talking about behavioural based finance or overlooking matters of intrinsic and fundamental valuation and how they do have a correlation over the longer term?

Your comment about options is an amusing word play, but more seriously, why not structure a diversified portfolio and then invest 1/12th there? That way one would be hedging themself against non-diversifiable risk as well as the effects of economic cycles. They could also go into investments with low beta's and make provision for this investment as having a high one such that one can also bring their portfolio beta down.

The issue is also about the Efficient Market Hypothesis, which tries to take all available information into account and even while there are some issues around the semi-strong variant it doesn't justify writing future markets off. Further still, option 'open interest' activity when measured against trading volume and price movement is a good gauge for subsequent movements and trends when using technical analysis.

I'm not a trader but I'm sure many analysts do perform probability calculations on new oil finds or that the 'smart money' is aware of potential new oil finds or fields in assessing values. True, the nominal value of oil will continue to rise over time, but then the real question, is, well, the price of such oil in real terms.

All of which seems to reinforce the (rather forceful) point Abiola was making.

renton

Reminds me of the Onions "Our Dumb Century". Headline says "We are invisible". Next day says "Pencils for sale".

renton

invisible=invincible

Abiola

"I'm not investing in them because long term futures markets are about psychology and have nothing to do with comodities: it's easy to lose everything while being right."

Oh please! If oil prices in 2012 are going to be much higher than the futures markets are predicting, then there's absolutely *nothing* for you to do other than buy contracts promising to deliver in 2012 at price ABC; when 2012 comes around, all you have to do is demand that NYMEX pay you the difference between the contract price and the amount you promised to pay. All your waffling here tells me is that you don't have a clue how futures markets work, but yet you think you have insights those who bet billions in them lack.

"Options are safer, but I'm told they don't really exist."

See, this is *exactly* what I'm talking about: who told you such nonsense, and how can you talk about the markets having it all wrong when you don't even know something this straightforward?

"I think oil companies are pretty stupid. They're probably right that investing in rent-seeking is usually more efficient than oil-seeking, but I think they're really overdoing it given current oil prices."

If you're confident you know what you're talking about, why not visit some futures and options trading sites and put your money to work? I mean, some are even conveniently advertising their services on this very page ...

PS: I forgot to mention yesterday that if you're so worried about margin calls you can simply pay the price ber barrel in full. There's no law that says you have to leverage your futures trading positions.

Factory

Hmm..
The price you believe the oil will be at when the future expires may not be high enough to make it a good investment, if it's below 5%pa, then you'll prolly be loosing money on it.

"Put your money where your mouth is by betting your life savings on 2012 NYMEX futures, or else shut up with your doom and gloom prophecies."
Indeed they should, but will you do the same and put your life savings into taking the other side of the bet?

Abiola

"The price you believe the oil will be at when the future expires may not be high enough to make it a good investment, if it's below 5%pa, then you'll prolly be loosing money on it."

"Peak oil" is *precisely* the claim that the value of oil will outrun any relatively risk free investment.

What would be the point: "the other side of the bet" IS the market.

gene berman

y or another. All is just as it should be in this best of all possible worlds.

L

Let me try this in other words:
I believe the opportunities exist to make the long-run (5 years) cost of oil be $30 per barrel. But I'm not sure if oil companies will exploit the opportunities. I don't what the price of oil will be in 5 years. If I thought it would be $30, I'd buy options. If I thought it would be $60, I'd build a coal liquefaction plant. I've thought about doing that, but the granularity is really poor. If I could find a small company doing that, I'd invest in it and buy options on oil.

Wayne: Betting that oil will go down has high beta.

Abiola: 1. I don't expect oil prices to go up.
2. I think you're confusing forwards and futures. Futures effectively have something like margin calls even when there's no leverage.
3. I don't understand your response to my claim that oil companies are stupid. That belief should not lead me to buy futures, but to make my own oil company.

Abiola

"I believe the opportunities exist to make the long-run (5 years) cost of oil be $30 per barrel."

If you believe this, then you clearly aren't a peak oil advocate, and my challenge isn't directed at you.

"Futures effectively have something like margin calls even when there's no leverage."

All you have to do is put the full sum in escrow; what's so difficult to understand about that? If you've promised to buy oil for $X down the line, no possible call could ever ask you for more than $X, and even that would be on the assumption that oil was free by then, something no one could possibly believe will ever happen between now and Peak Oil Doomsday.

"That belief should not lead me to buy futures, but to make my own oil company."

Anyone can put a few thousand into derivatives; not everyone can raise the millions needed by an oil company. Besides, isn't the "peak oil" claim that the oil is running out? What use is there in prospecting for a resource we are told we aren't going to be finding much more of?

Again, to the extent that you believe more oil can be found and that there's no guarantee super-expensive oil is just around the corner, my challenge isn't really aimed at you. Saying there are exploitation opportunities the major oil companies are missing is one thing: saying that one is certain that the financial markets have it wrong in predicting oil prices won't skyrocket over the next 7 years, well, that's something else altogether, and anyone so sure of this would be a fool not to exploit the profit opportunities it poses.

Sebastian Holsclaw

"Indeed they should, but will you do the same and put your life savings into taking the other side of the bet?"

You can be skeptical of peak oil claims without having a rock-solid counterclaim about where oil prices will be. I could think that prices will be somewhere between quite a bit lower and slightly higher (which I do in fact believe). My range of error is enough on that to make it a poor call for investment. 'Quite a bit lower' and 'Slightly higher' require different investments. I can do better with other areas. But if I believed the Peak Oil storyline, I would be fairly certain that prices will go up much higher. That would make it a great investment (if the storyline were true).

L

Abiola:
I am sorry for not communicated my position well, and getting distracted about the form of the challege.

As you indicate, peak oilers would make a long purchase, with limited downside, so my complaints do not apply, and they should invest, at least the ones with really extreme views. (While I would be making a short, which I think unwise.)

But my point is that, even if your challenge is sensible, I think you are arogant to invoke long-term futures markets as an information source. I cannot reconcile the prices they produce with what else I know about oil.

dsquared

I think that the really hardcore peak oil crowd would be worried about the financial security of NYMEX...

Also, I don't see why you're suggesting this test as it guarantees that you will only be debating this question with genuine fanatics. Personally, I would apply the reverse test and would only be prepared to discuss the matter with someone who had less than 20% of his wealth invested in oil stocks or futures, because they would a) not be so inclined to talk their book and b) be at least open to the possibility they might be wrong. It's rather like saying "I am only going to discuss the subject of Islam with somebody who has grown a beard and forced his wife to wear a burkha".

I also think that "hundreds of billions" is an order of magnitude out as an estimate of the amount of "free money" that could be available if peak oil is right. Total open interest for dates beyond June 2008 is about 130K contracts by my estimate, which is only about $4bn of total long or short positions. I doubt that very much price discovery at all takes place in the 2012 contract, which looks to me to have open interest of 5972, which would translate to about $189m of speculative money put in by peak oilers, balanced by $189m of carry trades on the other side.

Wayne

"L: Betting that oil will go down has high beta."

Apologies, that's correct. My mistake.

The comments to this entry are closed.

Notes for Readers