Saturday, December 27, 2008

Naughty and nice in the oil markets

It’s an iconic scene, playing out in many movies from Trading Places and Wall Street to A Good Year (below).

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Wily traders manipulate the commodity markets by placing a sudden flood of “Sell” orders.  The index plunges, panicked traders curse their luck and follow suit.  At the bottom, the traders buy it all back on the cheap, catching their rivals out and reaping tens of millions of dollars.

In the real world, regulators claim that speculators don’t drive markets.  Supply and demand are the primary determinants of prices, moving in response to spikes in consumption or kinks in production.  Short-term volatility can generally be traced to secondary factors, including weather, government policies, transport risks, the global economy, and prevailing sentiment.

But  recent swings in oil prices just seem to defy academic logic:


The microeconomic drivers behind these recent price movements aren’t very evident:

Oil v - p

So, is the heavy hand of wily traders behind the oil-price spike?

Time Magazine argues that hedging, rather than speculation, is at fault.  Refiner SemGroup overinvested in oil futures, amassing an 11% position by last summer.  When forced to liquidate it’s holdings, it stimulated a drop in prices just as markets were debating whether oil had reached their peak.  This, in turn, prompted a wider dash for liquidity, leading to further price declines just as the world financial crisis started putting pressure on global markets:

The price of oil began to fall, and speculators had to put up more money for margin, but their other investments were simultaneously declining (due to the collapse of credit and equity markets). Thus, they were forced to close out their long positions and sell oil. As everything spun out of control, everyone wanted out: a full liquidation. Even diversified investors tend to hold long positions in commodities as inflation hedges. Losses in stocks forced these long speculators to liquidate their positions in all commodities.

One thing that I didn’t realize is that the price of oil reported in the news is not actually the raw material price of the commodity.  It is, instead, the futures price.  The current price of $37.71 / bbl is really the asking price for oil that will be delivered in February 2009.  Further, the volume of oil contracts being  traded to set this price are a small fraction of the total volume of oil bought and sold on the world’s markets.

Two Stanford students have recently argued that these two characteristics may combine to make oil prices vulnerable to manipulation. An investment of less than 10 billion dollars could enable a speculator acquire a position in the  limited futures market that effectively drives prices throughout the larger world market, and then downstream into gasoline and heating oil prices.

They propose that limiting the size of positions or revealing the identities of large stakeholders would close the flaw.

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It’s an interesting theory, and suggests how far market structures and forces have diverged from our simple cinematic understanding of them.  It’s likely that our system is riddled with similarly subtle, systemic flaws that will need to be corrected if a recurrence of our current financial crisis is to be prevented.

Some feel that the whole collapse was engineered to precipitate a consolidation and reorganization of markets.  But I think that our actions have simply grown beyond our understanding. The ad hoc financial networks that developed over the past two decades harbor many hidden correlations and vulnerabilities that are not captured in classical models of discrete and transparent markets.

We now have abundant data to help illuminate the previously hidden factors and relationships that drive pricing and valuation.  We need to set better minds and models to understand the roots of our market failures if we are going to formulate effective policy actions and regulatory solutions.

It’s not going to be enough to send Russell Crowe to prison for market manipulation: we need to, in effect, better fence the playfield against excess, and assure rapid access to information and transparency to actions.

Ref: US Department of Energy

Wednesday, December 24, 2008

Knocking snow off the rhodies

a-Rhodie_snow 5 Everyone jumped when there were a series of thumps and thuds next to the house this morning.  One of the rhododendron trees had fallen over under the weight of the snow, now sprawled across the rear door. 

This kicks off the quintessential Pacific Northwest winter task, knocking snow off the landscaping.  The magnolia tree and the rhododendron bushes suffer more than the evergreens.  The taller trees tend to just droop, finally allowing the snow to slide off.  The bushes wither in the cold, but try to stay erect.  Eventually the branches break off.

a-Rhodie_snow 1 a-Rhodie_snow 2

The only solution is to take a broom and wade into the snow, whacking up from the bottom or out from the trunk.  Unfortunately, there’s no way to relieve the upper branches except to get in and shake the tree, dropping about a foot of snow down on myself.

a-Rhodie_snow 4 a-Rhodie_snow 3

a-Rhodie_snow 8And, of course, by morning, it all has to be done again…

The governor has declared a winter emergency as we break the snow records here in the lowlands…everyone is starting to look a bit weary from the weather.  My favorite was the dilapidated state of the tent at the local Christmas Tree seller.a-weary xmas

For myself, I’ve broken out the eggnog and the rum and have settled in for a warm and comfortable Christmas Eve.  Best wishes for a warm and happy holiday to everyone!

Tuesday, December 23, 2008

Two cookie recipes and one for cranberry relish


Holiday’s are always a time for preparing favorite dishes and festive treats.  I have several recipes that get dusted off at this time of year, and I spent most of the day with the daughter making cookies and cranberries.  The cookies are simply family favorites: the cranberry recipe comes form an out-of-print HP microwave cookbook, but has always been ‘can’t miss’ for jelling into relish at Thanksgiving and Christmas.

I managed to fill the kitchen with smoke making Dutch Speculaas cookies, baking at 375 instead of 350 <sigh>.  Part of the problem is that I mistook the Speculaas dough for the Molasses dough, making balls and rolling them in sugar.  In the end, I had golf-ball sized round windmill cookies.  I dipped them in frosting and turned them into festive little spice buttons…people are talking about making them a tradition now.  I think I’m just losing my touch in the kitchen…’glad I got a daughter to help!


  • 1 cup butter
  • 2 cups of all-purpose flour
  • 1 egg yolk
  • ¾ cup sour cream
  • ¾ cup granulated sugar
  • 1 teaspoon ground cinnamon
  • ¼ cup chopped walnuts (optional)
  • ¼ cup butter, melted

Cut butter into flour using two knives as if making a pie crust. In a separate bowl, beat egg yolk and sour cream well, then add to flour mixture. Mix until blended. Divide dough into three parts. Cover with plastic and refrigerate at least 3 hours.

Prepare filling by combining sugar, cinnamon, and (optional ) walnuts. Pre-heat oven to 375 deg F.

Working with one portion at a time, roll dough into circle 1/8” thick.  Brush each circle lightly with melted butter and spread one third of the filling on each.  Cut each circle into 16 wedges, like a pizza. Starting from the large end of each wedge, roll up toward point, jelly-roll fashion.  Place cookies on ungreased cookie sheets and bake 15 minutes or until lightly browned.  Cool on racks and store in covered tins.

Yield: About 4 dozen.

Cranberry Sauce

  • 1 cup sugar
  • ½ cup water
  • ½ cup cranberry liqueur, brandy, or mixture
  • 2 cups cranberries

In a deep 2-qt casserole dish, combine sugar, water, and liqueur.  Microwave, uncovered, at full power for 4 to 5 minutes, until boiling, stirring once or twice to dissolve sugar.  Syrup should be clear.  Stir in cranberries and cover loosely with waxed paper.  Microwave at full power for 5 minutes or until the skins on the cranberries pop, stirring once.  Uncover and microwave at 30% for 15 minutes or until thickened to the desired consistency, stirring once.  Cover and refrigerate.

Yield: 2 cups

Molasses Cookies

  • ¾ cup shortening
  • 1 cup sugar
  • ¼ cup molasses

  • 1 egg
  • 2 tsp baking soda
  • 2 cups all-purpose flour
  • ½ tsp cloves
  • ½ tsp ginger
  • 1 tsp cinnamon
  • ½ tsp salt

Melt shortening in a 3-4 quart bowl.  Add sugar, molasses, and egg, beat well.  Sift together the dry ingredients and add to the liquid.  Mix well, chill for 1 ½ hour.  Roll into 1” balls, and roll each in sugar.  Pre-heat over to 375 degrees F.  Bake on a greased cookie sheet, 2” apart (do not flatten the dough) for 5-6 minutes.

Monday, December 22, 2008

And still it comes….


The snow just keeps falling here, dominating the days to a much greater degree than Christmas shopping or tree-trimming.  Seattle, like the Netherlands, is a maritime climate, and an inch in the lowlands is unusual and usually dissipates within a day.

Not this year…

Shoveling out the drive- and walk-ways has become a daily task as new snow falls each night, adding to accumulations already over a foot deep everywhere.  My daughter’s car got stuck twice, once sunk into a drift alongside a road (scatter kitty litter, then shovel it out), and once perched hazardously on an icy hillside (block the road, then spin it out). 

Fortunately, the van just keeps chewing ahead, come snow or ice.  But things really gets hazardous in late evening, when the only people on the road are kids with trucks.

A few pictures of the beautiful mess…

My back yard and front yard (note the beautiful shoveling of the driveway!):

DSC04528 Stitch DSC04541 StitchSnowfall house

My neighborhood:

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Driving around my town:

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My Christmas tree:


Some photo credits to my co-pilot daughter.

Sunday, December 21, 2008

2008 Lists and New Year’s resolutions

I think that Tyler Brule needs to take a break from travel.

Winter Sunrise With a noticeable dip in blog traffic over the holidays, I’m broadening my early-morning reading to take in recent columns by some of my favorite essayists.  This morning, I logged in to the FT Weekend to catch up with Fast Lane columnist Tyler Brule, writing about “Top tips to stay travel slick”.

I have to admit that the whole concept of “travel slick” is a bit of a mystery: I guessed that it had something to do with grooming or efficiency.

Instead, it was a list of his top travel recommendations.

Well and good, I always like to find new places to visit and special things to see or do.  But his list focused, instead, on the process of travel: which airlines and hotels offered good amenities or little extras.

It’s a bit sobering.  When a vagabond’s life contracts to keeping a small-minded catalog of airlines offering fluted glasses and remodeled hotel gift shops, it turns the whole pleasure of travel on its head.  Isn’t the delight supposed to be in the places you go and the people you meet, not the appointments of an airline lounge?  What sort of people would envy, let alone emulate, Tyler’s experiences this year?

I’m not the only one questioning this: the Economist recently asked whether Tyler’s focus on judging hotels by the quality of their club sandwich isn’t stretching things a bit.

With a sigh, I put it down.  I can’t wait to see his New Year’s resolutions…

In fact, reflecting on that thought, doesn’t the type and quality of our lists say a lot about our interests and priorities in life?

If I take time to write about “10 worst business books of the year” or “12 memorable sunsets”, “6 can’t-miss sailing anchorages” or “5 great presentations”, that is a mirror of what I’ve sought and done over the past year.  Not just about the breadth of my experiences or whether I was paying attention, but more about the things I think about and care about in my life.

‘Back, then, to the resolution thing.  Rather than making a list of things I want to change or accomplish in the coming year, I’d like to create the titles for the top-10 lists that I want to publish at year’s end.

I’ve got a week to think about it, and the whole world and spectrum of potential experiences to choose among.  I like the exercise, it fits my philosophy of always looking for new ways to live in the world rather than to retreat from it.