11 June 2008

Case History 2006: Index Speculator Selloff

JD at Peak Oil Debunked presents an account of a selloff of "long-only" indexed oil futures by Goldman Sachs in 2006.
In addition to the issue of index funds accumulating long positions and thereby imputing an upward bias to commodities, there is another opportunity for market manipulation with respect to the construction and rebalancing of prominent commodity benchmarks such as the Goldman Sachs Commodity Index (GSCI).

As reported by the New York Times on September 30, 2006 Goldman Sachs significantly readjusted in August of that year the GSCI's gasoline weighting. Index products tracking the GSCI, and representing an estimated $60 billion in institutional investor funds, were forced to rebalance their portfolios resulting in an unwinding of positions. Originally, unleaded gasoline made up 8.75 percent of the GSCI as of 6/30/2006 , but this was changed to just 2.3 percent, representing a sell-off of more than $6 billion in futures contracts.

As a result, gasoline fell 82 cent in the wholesale market over a four-week period, an unprecedented move; and crude oil, which in July 2006 traded over $79 per barrel for August delivery—at the time an all-time record—subsequently fell to around $56 by January 2007. _PeakOilDebunked
Follow the link for more information on that story. What you are seeing in the long-only index futures is an "ever-tightening" of a spring. Eventually, the spring will unwind, and with will unwind a lot of pension and retirement plans. You may want to check and see where your pension fund manager is putting your pension money.

More links and information at this POD post.


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Blogger CarlBrannen said...

"As a result, gasoline fell 82 cent in the wholesale market over a four-week period, an unprecedented move ..."

I'm staring at the retail gasoline price figures and I don't see any big deal. The largest 4-week move I see is around 40 cents, which is a decrease of around 12%. Looking through the data, this is a large change but the eye finds 10% changes in 4 weeks easily enough, i.e. beginning 7/10/2000. Or the 14% drop beginning 05/28/2001.

Gas dropped from $2.741 to $2.211 starting on 10/17/2005. This is a $0.53 drop, a 19% drop, larger in both magnitude and percent than the one supposedly caused by the futures.

I didn't see a convenient price series for wholesale gasoline. So, are the wholesale prices less volatile than the retail? It seems to me that the two series should follow each other fairly closely.

I'm not sure what the volume numbers are for future's trading in gas. In ethanol, the total futures is tiny tiny tiny compared to the size of the market but ethanol is a recent futures addition.

Wednesday, 11 June, 2008  
Blogger al fin said...

From August to October, 2006, prices dropped 71 cents. I don't see the 82 cent drop over 4 weeks referred to.

Carl, you should have a front row seat to observe futures trading in ethanol and biofuels, as the market grows.

Wednesday, 11 June, 2008  
Blogger CarlBrannen said...

The recent problem in ethanol has been the ratio of conventional to reformulated gasoline. As the refineries switch over, we end up with gluts of one type of gas or the other, and the price of ethanol sky rockets or crashes.

And now bad weather has driven corn through the roof. We're looking into cellulosic.

Soon enough, the problem will be the 10% ceiling.

Friday, 13 June, 2008  
Blogger al fin said...

If gasoline prices keep rising, the push for flex-fuel vehicles will pick up. 85% ethanol vehicles would help the demand side.

Friday, 13 June, 2008  

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