Wednesday, 14 May 2008

Big investment powerhouses are increasing their exposure in energy commodities trading

It was an interesting news read from Reuters today about the intention of JPMorgan to increase its involvement in trading of enery commodities. The article titled "JPMorgan to start physical oil trade, eyes $200 oil" states that JPMorgan just announced that it will substantially expand its trading of energy commodities and energy derivatives:

JPMorgan will join a growing list of investment banks from Goldman Sachs to Barclays Capital seeking to boost profits on their big derivatives trading desks by gaining a foothold in physical markets.

The third-largest U.S. bank added 50 people to its commodities and energy trading and investment team last year and is on track to hire a similar number this year, taking the strength of the total team globally to 450, Masters said.

Earlier this month, it hired former Goldman Sachs banker Oral Dawe as managing director and CEO of its Asia Pacific commodities group, in addition to hiring more than a dozen traders in Asia recently to oversee its expansion in energy and metals.

And with oil prices surging more than 30 percent this year to a record near $127 this week, Masters said the bank would look at more ways to boost its presence in energy markets.

"Oil rising to $200? It could happen. This year? You could see it, although it would take a further shock to expectations," she said.

It is clear that JPMorgan is not the only investment bank which is currently looking for new innovative ways to make easy big bucks out of nowhere, after the old schemes with asset-backed securities and swaps recently stopped or nearly stopped working. For sure, there are other banks, which are currently salivating by looking at the big money flowing through the energy commodity markets. Since these creative crooks do not own physical energy commodities at source, they will try to find new ways to get the title on them through paper trading, which will almost surely involve complex energy derivatives.

What does it mean for prices of oil, natural gas, coal, and energy products? They are very likely to keep growing, boosted by speculative trading performed by big time market manipulators and insiders like JPMorgan. The recent $200+ oil announcement by Goldman Sacks was just one of the first stones thrown into the genral public pool to prepare them for the life amid skyrocketing energy prices ahead.

What does it mean for normal people? We will see multiplied volumes of speculative demand from big market players, which have received access to cheap liquidity thanks to the U.S. Fed and other Western central bankers joining the move. The new worthless money created in trillions of dollars will chase real material sources of value, which is largely represented by various commodities, including energy resources and energy products. Higher costs of energy commodities arising from increased speculation will surely result in very high general inflation rates and growing costs of food, transportation, housing and everything else. It can have pretty hard abverse effects on most people.

What are going to be the consequences for economies around the world? Not good, as prohibitively high costs of energy and fuel will effectively halt production activities of many companies and energy-intensive economic sectors. Even oil and gas producing nations will suffer through double- and maybe even triple-digit inflation rates.

The bottomline: The energy markets will soon see quickly growing levels of speculative activity, with everybody joining the party and with new derivative products being introduced to return-greedy investors. We all know how the story of mortgage-backed derivatives ended (well, not ended just yet, to be precise). In the case of energy derivatives, it will not be any different. We will see energy prices taken far away from their true fundamentals. The resulting chain reaction can surely hurt many people, organizations, and states.

Do the bankers care about possible dire consequences of their involvement in yet another market which they can screw up? I doubt it. They should have been punished hard for the subprime crisis and credit derivatives. Sicne they weren't, they will be fast in creating another bubble for their masters, and the main private bank, the Federal Reserve, will asist them in doing so by lending easy electronic and paper money in return for now wortheless securities left over on the banks's book from the preivious bubble.

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