Wednesday, July 29, 2009

Firms Make A Case Against New Trading Limits

During the big run up in oil all you heard was that speculators are driving the prices up. To a small extent they are right however, lets take a look at the bigger picture. Oil companies function for one reason and that is to make a profit. There are no if's, and's or but's about it. If you don't think that why is Brazil able to have our same American cars running off of alcohol, gas or any combination of the two.

Now in trading there are some things most folks do not know that never gets covered. Most traders like small businesses fail in other words they lose money. Commodities are composed of three types of traders:

1. Users like the oil companies
2. Large traders like JP Morgan
3. Small traders like John Doe

The users like the oil companies are always in control of prices. And the reason is simple they buy the products for using to sell to us. Now if at any time the price is not what they want to pay they simply will not buy. This is kind of like regular people if you don't like the prices at the store you simply don't shop. If you don't shop naturally the prices will go lower. Now the oil companies are not buying the products at high prices they do exactly the opposite they buy at low prices. So when the price of oil is $25,$35, $45 and $55 per barrel they are buying like crazy. Once the oil companies are finished buying they will protect their positions by hedging.

Now here is where the fun starts since they already have all the product locked in at a good (Their fridge is stocked) price they will allow the large and small traders to run up the prices and provide liquidity. The oil companies want large and small traders to run the prices up. They get to charge $100, $120, $130 and $150 per barrel prices for the prices they paid. Now when they need more they simply will not let the prices go up and the hedged positions they have make money on the way down.

The media also plays a role in this as they will hype up the traders and all you will see is information that leads traders and people to think prices are going higher. Once enough people are in at the top they will pull the floor out. Kinda like gold right now everyone is bullish so maybe it's time to look at selling.

Another simple fact is large traders and small traders simply do not have enough money to push the market around with some serious help.

Firms make case against new trading limits

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