Speculators Are Bleeding You Dry
By Andy Carpenter 
Here’s a quote from the New York Times: “The price of oil this year will turn on several developments around the world, among them the rise of China's economy, whether the United States dollar continues falling as many in the industry expect and political uncertainty in nations with substantial oil reserves: Iraq, Russia, Venezuela and Saudi Arabia.” Here’s the paragraph that followed that one: “Major developments in any of these areas could cause the price of oil to rise from its current $32.52 a barrel for light crude on the New York Mercantile Exchange. Barring any unexpected or calamitous events, many analysts say it is even possible that the price will slip slightly, possibly to $27 to $30. But the price is expected to remain relatively high.” Oh yeah, that quote is from a story The Times ran on Jan. 4, 2004. Now, try this quote on for size. It’s from Time Magazine: “And just as oil is seen driving American foreign policy, so too are China's geopolitical strategies increasingly influenced by the country's inability to meet its energy needs solely through domestic production. Last week Russian President Vladimir Putin began a state visit to China, during which Chinese President Hu Jintao was expected to press for the swift approval of several proposed billion-dollar, oil-and-gas joint ventures between the two countries, including a pipeline to connect Russia's oil fields with China's main domestic distribution network.” Ripped from today’s headlines, right? Nope. It’s from Time’s, Oct. 18, 2004 issue. And, by the way, the New York Times was wrong. The price of light crude didn’t drop in 2004. By Oct. 18, it was making big news when it edged to $55 a barrel. Of course, sooner or later, you know I am going to use a quote from fresh story. Maybe it’s this one. After all, it’s about the President’s reaction to something that’s been in the news as recently as last week. “President [Bush] rejected suggestions Wednesday that he release oil from the government's strategic reserve in a bid to ease the price of gasoline, accusing Democrats of "playing politics" over soaring gas prices. “Bush said he "fully understands" how the rise in prices "affects American consumers, how it crimps the budgets of moms and dads who are trying to provide for their families, how it affects the truck driver, how it affects the small-business owner.” But, guess what? That’s old news, too – Los Angeles Times May 20, 2004. You see, my point is this – look around your world and ask yourself what’s really changed in the past four years… what’s really driving the price of oil up? From where I sit, the answer is pretty much “not much that I can see,” unless you also consider how vast the leadership vacuum in Washington has become. Or, you consider oil company CEOs as national leaders. And, before you Presidential apologists get all scrunchy nosed at the mere mention of Washington and leadership vacuum, I picked 2004 just to be fair. It represents four years of President Bush and fours years of a Democratic controlled Congress… four years that flashed by since these quotes were published. Four years of zip, zilch, zed, zero on the leadership front when it comes to oil policy. That is, unless you call it leadership when oil executives whine to Congress on a regular basis about how their hands are tied when it comes to prices and anyway, “we’re always concerned about shareholder value.” I love that last one by the way, like we’re so dumb that when they say “shareholder” they think we hear stakeholder. The Truth Will Bust You Flat Broke But, sometimes those oil executives do tell the truth, though blaming global demand is not part of that truth. You see, the US burns about 21 million barrels of oil a day, of which close to 12 million barrels are imported. China only goes through about eight million barrels a day, of which four million must be imported. But, the truth is that oil executives were correct back on April 1, when they told congress that the price of a barrel of oil should be about $55 (it was mere $100 then). According to the oil executives, the price discrepancy – one that continues today – is due to oil futures speculators running the price up. From The Folks Who Brought You The Mortgage Crisis What the oil executives didn’t admit, however, is that these speculators are their pals. They work for some of the biggest banks and investment houses in the world. And, they are not speculators in the truest sense of the word, because US federal regulations allow them to put down very little cash when they make their oil bets. Here’s why. Under current regulations oil speculators only need to have between 5% and 7% in the margin accounts that they use to trade oil futures. That’s it. To place a $10 million bet that oil will go up or down only requires a maximum commitment of $700,000. To put that another way, it would be as if your broker only required that you have $14 in your margin account when you buy by a single $200 options contract… and that’s not some made up number, a single options contract usually runs in the $200 to $400 range. But, back to the oil speculators, because the vast majority of them work for name-brand investment banks, pension and hedge funds. In other words, they are Wall Street’s big guns. You know, the one’s that just got burnt big time on the mortgage crunch. Robber Barons Redux Once they started going long on oil it was fairly easy to perpetuate the run… all they have to do is buy at the ask price and oil just keeps going up and up. Now, I know you veteran commodities players are already shouting that commodities exchanges limit the number of positions an investor can take in the market. And, that is true for you. But, the Commodity Futures Trading Commission created a loophole that allows the big investment banks and institutions unlimited commodities speculation. It exempts investment banks like Goldman Sachs and Merrill Lynch from reporting requirements and limits on trading positions. The loophole allows pension funds to use an investment bank for oil speculations. The bank then trades unlimited numbers of the contracts in futures markets for the funds. In fact, the US Treasury Department even tracks the biggest exempt players. The top five are Bank of America, Citigroup, JPMorgan, Chase, HSBC North America Holdings, and Wachovia. These are the same players who trot out their oil experts on TV, the Internet and in print media. Guess what their job is? Cry wolf about the flying price of oil. Fixing The Fix There is, however, an easy solution to this problem of you paying anywhere from a $1 to $1.50 a gallon extra at the pump so some already super wealthy bankers can get mega wealthy. But, sadly, it’s a solution that involves leadership. You see, congress could quickly pass a law that requires oil futures speculators to have as much as 50% of their bets in their margin accounts. My brilliant equity options trading wife, Lynn, says that even 20% would likely do the trick. That’s because those oil-futures bets would then require tying up a massive amount of cash… cash used for other bank investments. And, such a requirement would have two positives effects. It would slow down wild-ass speculation enough that oil prices would begin to slide back to a somewhat normal level… say $70 to $75 a barrel And, it would prevent a banking disaster as big or bigger than the mortgage crunch… and it should matter to you. Because even though such a disaster would involve rich white guys and not middle-class homeowners – the Fed would rush in and rescue the banks with billions of your tax dollars. This new crisis would begin with two words… “MARGIN CALL,” which in Wall Street parlance means, all bets need to be covered now. Pay up! Of course, the moment higher margin limits were proposed the banks would howl. Their lobbyists would claim the regulation was un-American and anti-capitalistic. And, they’d be right. Because, there’s nothing more American than bleeding the middle-class host to an inch of its life. Lock and Load. Andy Carpenter P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. [Ed. Note:In the past 10 months Asia Business & Investing subscribers have booked outlandish gains. These recent winners include 562%, 300%, 383% 197% 149% 123%, 102%, 649%, 319%, 179%, 77%, 196% 100%, 126%, 185% and 430%. Find out more about how you could tap into superb gains like these right here.]
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Have I Got an Oil Well For You By Andy Carpenter I know a guy in the financial newsletter business who sells his subscribers’ names to an oil investment boiler room for something in the neighborhood of $800 a name (and he’s not a very famous newsletter guy, so stop guessing). The boiler room has been shut down by regulators in two states, but it thrives today. Why wouldn’t it? Oil investing has to be easy as pie today right? Not a chance. The big guys are way too expensive and you have to tie up a ton of money to cash their so-so dividends. So, I thought I’d run a few tips buy you about how to avoid getting scammed by the slick con men who are pitching mini oil deals today. These tips are right from the SEC, which has likely seen every investment scam in the world. FRAUDULENT SALES TECHNIQUES Fraudulent oil and gas deals are frequently structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. Thus there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for law enforcement officials and victims to identify and expose the fraud. BOILER ROOMS & INTERNET PITCHES In order to attract the interest of potential investors, unprincipled promoters frequently use the Internet and “boiler room” offices with banks of phones manned by salespeople with little or no background in energy exploration, but plenty of experience in high-pressure sales. Their techniques include repeated unsolicited phone calls to members of the public, hyping the profitability of the deal. Some swindlers use professionally designed brochures. Beware of unsolicited oil and gas promotions on the Internet and through e-mail. State securities regulators caution potential investors to beware of the following claims in a typical high-pressure sales pitch, whether through unsolicited telephone calls or e-mail messages: - You will have an interest in a well that cannot miss;
- The risks are minimal;
- A geologist has given the salesperson a tip;
- The salesperson has personally invested in the venture;
- The promoter has “hit” on every well drilled so far;
- There has been a tremendous “discovery” in an adjacent field;
- A large, reputable oil company is operating or planning to operate in the area;
- Only a few interests remain to be sold and you should immediately send in your money in order to assure the purchase of an interest;
- This is a special private deal open only to a lucky chosen few investors.
Finally, let’s close today with a quote I pulled from a Forbes piece that was penned by Donald H. Straszheim, vice chairman of Roth Capital Partners in Los Angeles “It has been almost 35 years since the first oil shock in October 1973. At that time, OPEC raised oil prices from $2.71 per barrel to roughly $8 per barrel...” And, yup, this one is a fresh quote. It’s from the May 28, 2008 Forbes. The line that finishes Straszheim’s quote is “and we still don't have an energy policy. What's the hurry?” Have a great weekend. Andy P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com. [Ed. Note:In the past 10 months Asia Business & Investing subscribers have booked outlandish gains. These recent winners include 562%, 300%, 383% 197% 149% 123%, 102%, 649%, 319%, 179%, 77%, 196% 100%, 126%, 185% and 430%. Find out more about how you could tap into superb gains like these right here.]
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