Why Oil Speculators are Not to Blame

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By Ian Cooper

Saturday, July 12th, 2008

Editor’s Note:

While some of you may know Ian Cooper from past options trading services, his 4,500% cumulative gains of 2007, and gains such as these.

• Fremont General September 2007 12.50 puts — 291% in 16 days
• Lennar January 2008 25 puts — 279% in 40 days
• Pulte January 2008 15 puts — 224% in 40 days
• New Century January 2008 25 puts — 214% in 16 days
• Centex January 2008 25 puts — 207% in 40 days
• Countrywide January 2008 27.50 puts — 203% in 69 days
• Thornburg October 20 2007 puts — 188% in 6 days
• MGIC Investments December 35 puts — 175% in 80 days
• Capital One January 2008 65 puts — 160% in 59 days
• Accredited Home September 2007 7.50 puts — 141% in 4 days
• Hovnanian November 2007 17.50 puts — 136% in 13 days
• Radian Group August 2007 60 puts — 122% in 19 days
• Standard Pacific September 2007 15 puts — 111% in 2 days
• Autonation January 2008 20 puts — 105% in 49 days
• New Century January 2008 25 puts — 89% in 1 day

. he’s decided to launch a new options service, Options Trading Pit, which will look to profit from the market’s demise and well as its upside.

In fact, he’s been beta testing new strategies in the Options Pit blog, sitting with gains like these:

• Expedia Inc. October 22.50 put: 189% in 31 trading days
• Coca Cola Enterprises November 20 put: 271% in 31 trading days
• Masco Corporation October 20 put: 92% in 27 trading days
• Lehman Brothers Holdings October 20 put: 313% in 27 trading days
• UBS AG September 22.50 put: 165% in 21 trading days
• Walt Disney Company October 27.50 put: 10% in 2 trading days

Are gains like these easily attainable? You bet. especially in today’s bearish environment.

Options Trading Pit launches shortly. Stay tuned.

Today’s Energy and Capital: Why Oil Speculators are Not to Blame

Oil speculators have been blamed for skyrocketing oil prices. but it’s not their fault.

It’s a supply and demand issue.

Even Warren Buffett agrees. In my lifetime, up until the last year or two, there’s been a huge amount of excess supply available, he said. We don’t have excess capacity in the world anymore, and that’s why you’re seeing these oil prices.

Couple that with news that world energy consumption will rise 50% between 2005 and 2030, as demand in developing countries rises 85% and oil worst case scenarios become plausible.

But in a witch hunt against any one, or anything, responsible for the problems, speculators are taking blame.

Ask the airlines and they’ll blame the speculators, too.

Northwest and Delta are among a group of 12 carriers asking Congress to address oil speculator issues, whom they still blame for rising oil cost.

The carriers even issued a statement, saying We are urging our customers and employees to ask Congress to act quickly to curb speculation in the commodities markets. This speculation, while not solely responsible for the extraordinary rise of oil prices in recent months, continues to make the situation much worse harming the economy and having devastating effects on our industry.

For airlines, ultra-expensive fuel means thousands of lost jobs and severe reductions in air service to both large and small communities, the CEOs said. To the broader economy, oil prices mean slower activity and widespread economic pain. This pain can be alleviated, and that is why we are taking the extraordinary step of writing this joint letter to our customers.

Sen. Joseph Lieberman and Rep. Bart Stupak, too, believe oil speculation has added some $70 to the cost of oil.

Lieberman wants to ban funds or institutions with more than $500 million in assets from betting in futures markets. Stupak introduced The Prevent Unfair Manipulation of Prices Act, accusing Goldman Sachs and Morgan Stanley of market manipulation, even though he has no evidence of such illegal behavior.

Unfortunately, the assertion of speculation and manipulation theories doesn’t hold up.

Even if you restrict the blamed speculators, it won’t curb higher oil cost.

According to the Wall Street Journal, the wild assertions about speculation and manipulation are defective, and completely unsupported by reliable evidence.

For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices.

It’s a fact. The run in oil prices is very painful for us all. But to focus on speculation as a culprit is misguided at best. The real culprit here is continued heavy global oil demand in the face of slowed production, supply disruptions, and a weaker dollar.

And if you need more of a reason for a rise to $150, $170, even $200, look no further than the Middle East.

Israeli-Iranian tensions over nuclear projects aren’t doing much to help. There’s a growing fear that in the event of war with Iran, the Strait of Hormuz (passageway for 90% of oil exported from Gulf producers) would be jeopardized. If that happens, we’d see an immediate oil super-spike.

Iran’s Revolutionary Guards has already said it would impose controls on shipping in the Persian Gulf and Strait of Hormuz, which accounts for about 40% of the world’s oil, if it were attacked.

Big oil companies are agreeing with Buffett.

The heads of some of the world’s biggest oil companies recently countered claims that speculators were driving high oil prices, instead blaming a dearth of new supplies.

Executives from Royal Dutch Shell, BP Plc, and Respol YFP said restrictions on where they can invest and higher taxes meant they could not help boost supplies as much as they might.

BP’s CEO Hayward felt that oil speculation theories were a myth, adding that supply-demand failures are the reasons for recent price hikes.

The Respol CEO agreed, saying, The fundamentals in the industry are the significant reasons for having these prices.

Even Goldman Sachs and Chicago Mercantile Exchange Chairman Emeritus Melamed dismissed the theory of speculation.

The reason we’re seeing higher crude oil prices is because demand for oil has risen significantly in the last few years, says Melamed. the oil demand-supply equation in the world has changed. While there has been a massive 25 per cent rise in oil demand, the supply of the commodity has come down resulting in this current price rise.

So How do You Profit from Higher Oil Prices?

You buy domestic oil and alternative energy companies.

Making these companies even more attractive are the oil and gas discoveries and the fact that domestic explorations are more appealing given geopolitical tension.

You know as well as we do that prices would come down sharply if we started producing on our own. And it’d be a strong global signal that we’re not willing to be hostages of oil rich companies.

Even the President agrees.

Our problem in America gets solved when we aggressively go for domestic exploration, Bush said.

Listen, we’re not economically pessimistic at Energy and Capital. But we won’t put on the rose-colored glasses and tell you everything’s fine. Our goal is to profit from the situation, which we’ve been doing in Energy and Capital, Pure Energy Trader and The $20 Trillion Report.

Good Investing,

Ian L. Cooper

In case you missed our other investment opportunity highlights, here’s what we covered in Wealth Daily, Gold World, Energy and Capital, and your free blogs for the week of July 7, 2008.

In my last position at a competing company, I recommended a buy on IndyMac January 2009 20 puts. And I wasn’t the only one that saw the coming IndyMac disaster.