On May 29, 2008, about when the price of oil reached a record high, the Sacramento Bee published a letter to the editor from Jerry Hinck from West Sacramento:

 

I have yet to any rational explanation as to how the price of gasoline (or diesel) at local gas stations is influenced on a daily, weekly, or monthly basis by the price of crude oil for future delivery.

The price of crude is a speculative venture controlled by the essentially unregulated and untaxed New York Mercantile Exchange (NYMEX). There are insufficient margin requirements for the gamblers running up the price of crude. Energy insiders have stated openly that without NYMEX speculators, the price of crude oil would be around $50 to $60 per barrel [instead of $130].

However, this speculation is for future delivery of the crude. First, the crude must be pumped to mega tankers and shipped to refineries thousands of miles away. It never ceases to amaze me how the NYMEX price one day is reflected in the price of gasoline the following day. And the price goes up at every gas station (Shell, Arco, Valero, etc.). No collusion here, at least not anything on paper. The current price of crude, gasoline, and diesel isn't based on principles of supply and demand; it's based solely on greed and rigged by speculators at NYMEX and Big Oil.

 

Please provide the rational explanation Mr. Hinck seeks. Please compose your thoughts into coherent paragraphs. You may find helpful this extract from the "Large trader" reports to the CFTC (all delivery months together, contracts of 1,000 bbls).

 

                                                   May 27, 2008                           

                                               contracts       traders                     

NYMEX crude oil

Speculative longs                   215,999              88                                   

Speculative shorts                  190,132            127                                   

Speculative spreading            215,580            125                                   

Commercial longs                  823,619              86                                   

Commercial shorts                 834,788              98                                   

Non-reporting longs                83,676                                                                       

Non-reporting shorts                98,374                                                     

 

Concentrate on Mr. Hinck's sentence beginning: "There are insufficient margin requirements . . .". Do you agree with his argument?

Concentrate on Mr. Hinck's sentence beginning: "Energy insiders have stated openly . . .". Do you agree with his argument?

 

Concentrate on Mr. Hinck's sentence beginning: "It never ceases to amaze me how . . .". Do you agree with his argument in that paragraph and stated more broadly in the beginning of his letter?

 

Mr. Hincks, no more than the rest of us, could have foreseen the future. Have the ensuing 15 years on the NYMEX crude oil futures market added or weakened support for his letter to the editor? Be as specific as possible.

 

This past May had many sources of uncertainty. What policy will the Federal Reserve pursue regarding interest rates? Will Congress raise the debt ceiling and so avoid a default on U.S. bonds. Will world-wide trends lead to a recession? Let's concentrate on these uncertainties as expressed in the U.S. stock market, specifically the S&P index as represented in the CME's futures contract. Here are tables for either end of May:

 

At the close on Friday, April 28, 2023

                        Settlement Price            Day's volume          Open interest

June '23                4188.50                        1743872                   2280491                       

Sept '23                4226.75                              2812                       21564

Dec '23                 4263.75                                181                         3782

 

At the close on Friday, June 2, 2023

                        Settlement Price            Day's volume          Open interest

June '23                4288.00                         1937522                   2416138                       

Sept '23                4331.00                             26948                       67483

Dec '23                 4374.75                              1008                          6457

 

 

Similar tables could be shown for interest rate futures, but to keep things simple, let's compress that information. Rates for over the next six months were 5.1% per annum on April 28 and 5.25% on June 2.

 

What is the change over the month in the market's expectations about the expected dividends to be paid by companies in the S&P 500 Index over the six months through December - a decline in which would indicate a fear of a recession?

Political pundits stressed over May that a default on government debt would disrupt everything, including the stock market. To what extent, if any, did those trading the S&P 500 Index futures seem to agree? Be as specific as possible.

 

Why, during a month of much uncertainty, did the open interest in the S&P 500 Index futures contract increase (if only slightly)?