Prometheus 6

You can't just roll over a future; you need to have someone there to buy it at the strike price when it matures.  Futures expire after 6 months, after which you need to take delivery or sell it to someone who will.  If the spot price is less than the strike price (the price per barrel for which the future sold), then it's a loss.

Allegations of an oil bubble have been in the air for at least 30 months.  The idea that the derivatives market could pull the price of oil $55-95 above (i.e., 1.68-3.75 times) the "market fundamental" (or "natural" price) is just silly.  

I knew he'd jumped the shark when he mentioned Enron.  Enron was (a) a horribly managed company, itself created by numerous mergers and acquisitions; (b) not just a trader, but manager of several tradable streams markets and also owner of much of the stream infrastructure (pipelines, fiberoptic cable, etc.); and (c) abetted by a staggeringly corrupt cabal of malfeasant officials (most notably Sen. Phil Graham).  But Enron was dealing with streams; fixing a stream is as easy as shoplifting at a fleamarket.  It's a gimme.  Oil and wheat are flows, and much harder to manipulate.

Just to be clear: flows are things that can accumulate, streams are processes you pay to participate in?

I'm skeptical of the claim that futures really do move price shifts forward in time.  The price of anything reflects the best available prediction of future prices (discounted for time).  The price of a future reflects time discounting as well, so I think it's actually bad economics to claim that the ability to speculate on prices in the future is really going to influence the price now.

In the June 2006 Senate Committee Report (PDF; Norm Coleman, R-MN, Carl Levin, D-MI),  they cite futures as providing an incentive to increase inventories.  Also, in his 10 June testimony, George Soros cites speculation as one of four possible causes; he mentions that, under current conditions, crude oil would have a backward-sloping supply curve (meaning, as prices increase, the quantity supplied goes down).  He also suggests that there is a long-term bubble for oil and a short-term bubble.  

However, inventories of crude have declined considerably since mid-2006, so speculation-induced hoarding is not a plausible culprit; Soros himself conceded that the backwards-sloping supply curve is his surmise.

There's a lot of money in the derivatives market, indeed; but most of it flows out after a few months, since it's nothing more than a store of value. 

A flow is a term I coined to refer to commodities that are produced and sold in large volumes and at steady rates.  Oil prices go up and down, but consumption and production are actually fairly stable at 78-83 million bbl/day (Department of Energy-Energy Information Administration).

To give you an idea, that's about  10 million metric tons per day, or a cubic kilometer every hundred days. 

A stream is, as you say, a process you pay to participate in. 

I've been doing a lot of reading since writing the above, and I'm not so sure of some of the things I said above.

You can't just roll over a future; you need to have someone there to buy it at the strike price when it matures. Futures expire after 6 months, after which you need to take delivery or sell it to someone who will.

This is wrong. I am so sorry, but that's not so. You can indeed roll over futures in some markets, and you DON'T need to accept delivery; you can cash out in several different ways.

Another thing: I was under the impression that the commodities known as West Texas Intermediate (WTI) and Brent referred to very specific commodities: one being a mixture of crude oil from West Texas, the other crude from the North Sea. In fact, WTI and Brent are benchmarks; most (not some, but most!) futures in WTI are fulfilled through an EFP, or "exchange of product" which includes combinations of crudes that average to WTI in commercial value. In other words, WTI is itself a virtual commodity, like 2,2,4-trimethylpentane ("isooctane").

The method by which futures contracts influences the cash settlement market for flows actually varies among different types of flows; rice, corn, soybeans, and sugar have one system (which predictably results in massive gluts), while oil has another. I'm still writing up a post on this at my technical blog.

Believe it or not, I was doubtful because I remember one of those prank TV shows pulling up to a guys house with a trailer of pigs in settlement of a futures contract. Not the sort of thing you can offer as evidence, so...

Having discovered I was wrong on the matter of future settlements and possible rollovers, I have been reviewing three other comment threads where this subject came up. I can't find any serious mistakes in what I wrote elsewhere.

I remember one of those prank TV shows pulling up to a guys house with a trailer of pigs in settlement of a futures contract

I understand that livestock futures are yet another system for settlement. I'll admit here and now that I don't know those are settled, except that nobody is going to show up with a truckload of swine and deposit it in your front yard. Future contracts include a default point of transfer, and if you don't pick up they'll sell your shipment to somebody else.