Speculation
Taking commodity risk for profit, providing the liquidity that transfers risk from hedgers.
Overview
Speculators run from trend following funds to oil majors proprietary desks, index money, and retail option crowds, and they hold the other side of hedger positions, earning a risk transfer premium when curves slope downward. Liquidity is the service: without them a farmer selling March corn faces a thin market and wide spreads. Position limits cap size in sensitive contracts, a response to corners such as the silver episode of 1979 80. Momentum buying can overshoot, as in the 2008 oil run to 147 dollars. Speculation turns politically radioactive during food price spikes, and the financialization debate, how much index money amplifies prices versus reflects fundamentals, remains unresolved.
Related Topics
Futures Contracts
Each contract fixes quantity, quality, delivery point, and months, 1,000 barrels at Cushing, 5,000 bushels in store, so only price...
Spot and Forward Markets
Spot is now: wet barrels, cash grain at the elevator, metal in the warehouse, priced at a location with a differential to the benc...
Contango
The term, an old piece of London exchange slang, describes an upward sloping forward curve where nearby months are cheaper than de...
Backwardation
In backwardation the front month costs more than deferred months: users bid up barrels available now, paying a premium for immedia...