Don't look now, but oil is approaching $50
- Thread starter Tilted
- Start date
Beta84
They're out to get us
So you're criticizing Obama for not changing something after 2 months that Bush didn't change after 8 years?
Seriously, is the President supposed to quickly change every single law he thinks is a good idea and then just sit on his ass the rest of his term? It sounds like there are a ton of things he could be doing to continually change the country. Maybe he hasn't gotten around to it yet since gas prices aren't at $4 a gallon.
Larry Gude
Strung Out
Bush very much SHOULD have changed the speculation rules on energy; it cost us over $2 trillion since 2004 that went overseas to nations that do NOT reinvest in the US economy. Think how devastating that was to us AND his presidency.
So, Obama may like to look at this the same way; the affect on his own initiatives. People are not going to stand for his energy schemes if we're going back to 3 and $4 gas, or worse when they know damn well, like AIG, all that money is going into the pockets of people who manipulated and took advantage of the system.
To me, if I am him and have all these spending plans, the first thing I do is look at the key impediments to what I want to get done and fix the easy ones first. This would be an EASY regulatory fix.
Larry Gude
Strung Out
Same old story; the big boys looking for a place to protect the value of their money as the dollar falls thanks to Bernanke's magic act of yesterday. It'll be back up to $100 by fall if this keeps up.
Tilted
..
$51 Crude, $1.43 RBO, $1.36 HO 
It's becoming clear that the oil trade is starting to trade on future expectations again, as opposed to trading on current fundamentals. That shift has been happening over the last month. It isn't acting as decisively in response to bearish indicators as it was 3 months again.
The news that OPEC wasn't going to cut anymore, and the inventory data the last couple of weeks, should have suppressed the oil market some - but instead it is choosing to ignore such information and look to the future. It is deciding that economic recovery is on the way, and it is going to price itself based on that assumption. Bottom line - the oil trade is becoming more speculative again.
I don't think this will lead to the kind of runaway pricing that we saw last year, but I do think we've seen the end of sub $2 gas for a while.
It's becoming clear that the oil trade is starting to trade on future expectations again, as opposed to trading on current fundamentals. That shift has been happening over the last month. It isn't acting as decisively in response to bearish indicators as it was 3 months again.
The news that OPEC wasn't going to cut anymore, and the inventory data the last couple of weeks, should have suppressed the oil market some - but instead it is choosing to ignore such information and look to the future. It is deciding that economic recovery is on the way, and it is going to price itself based on that assumption. Bottom line - the oil trade is becoming more speculative again.
I don't think this will lead to the kind of runaway pricing that we saw last year, but I do think we've seen the end of sub $2 gas for a while.
Larry Gude
Strung Out
$51 Crude, $1.43 RBO, $1.36 HO
It's becoming clear that the oil trade is starting to trade on future expectations again, as opposed to trading on current fundamentals. That shift has been happening over the last month. It isn't acting as decisively in response to bearish indicators as it was 3 months again.
The news that OPEC wasn't going to cut anymore, and the inventory data the last couple of weeks, should have suppressed the oil market some - but instead it is choosing to ignore such information and look to the future. It is deciding that economic recovery is on the way, and it is going to price itself based on that assumption. Bottom line - the oil trade is becoming more speculative again.
I don't think this will lead to the kind of runaway pricing that we saw last year, but I do think we've seen the end of sub $2 gas for a while.
I disagree. Until housing straightens out, there is NO way to see a sunny day
coming. This is simply protecting dollars. In my opinion.
Tilted
..
I'm not saying that economic recovery is on the way - I'm saying that is how oil is trading. Absent that belief, it shouldn't be up as much as it is. There is some dollar protection going on, to be sure - but there are better ways to do that, and those ways are being heavily utilized.
And I'm not just talking about oil's move today - I'm talking about its overall behavior over the last couple of weeks.
Larry Gude
Strung Out
What's better than oil?
Tilted
..
In the short term - U.S. treasuries - they got flooded yesterday after the Fed's announcement. IIRC, 10 year note yields dropped 50 basis points - a historic move. They are the most liquid instrument in the world, and you can rest capital there up until the moment that you believe inflation is kicking in.
Then, of course, for immediate protection there is gold. Gold has the advantage that it doesn't really ever have to reconcile with reality - it is largely a belief trade - and it can maintain belief (or if you prefer, fear) based pricing for a long time. Oil eventually has to reconcile with the fundamental realities (witness the crash in the second half of last year), so in certain economic and emotional conditions it is more dangerous.
But like I said, you are right about dollar protection - that is certainly going on - but oil has been trading contrary to the news cycle for a while. If it had been trading the current fundamentals, it would have been closer to $40 when it got the Fed news yesterday, and would still be well below $50 now.
Larry Gude
Strung Out
The thing I see with oil is that it is just rock solid predictable; we're (the world) gonna use somewhere around 80 million barrels a day, day after day, month after month, so, it's pretty bullet proof there. And your comment about gold goes for oil too; it can be pure fantasy. If enough people get involved, it's a simple matter of buying at 40, selling for a few dollars more over what, all sorts of options, then buy at the new price, sell at the newer price, they MAKE the market regardless of what anyone does, supply or demand, because nothing dramatic is very likely from either end.
Take that argument apart. Seriously, I'd enjoy your thoughts.
Tilted
..
I think we are talking about subtly different issues (or, I'm talking about 2 subtly different issues, only one of which is the same as what you are talking about).
One of the things I'm talking about - as with U.S. Treasuries - is a place to rest money. That's a kind of 'dollar protection', but now that think about it, it's not the kind you are talking about. It's not a means of fighting inflationary forces, just a place to park money when inflation isn't actually in force (as right now - we have set up the dominoes for tremendous inflation in the future, but it's not happening now). If someone is looking for this, I think Treasuries are a better, safer option than oil.
The other kind of 'dollar protection', and the thing I think you are referring to, is active protection against the anticipated devaluation of money - inflation - something someone might do when they think inflation is either happening or right on the doorstep. In that case, oil and gold, are clearly much better than U.S. Treasuries. But, I don't think there is a lot of money in that mode right now. And, I think a lot of that which is, is going into gold. Some is definitely going into oil, and you are probably right that it has caused most of today's move - but what I'm talking about happening, is the general trend of oil in the last few weeks. That trend has been to ignore fundamentals, and trade higher in spite of short-term bearish indicators. Future speculation is wrestling more control away form current fundamentals. It's a back and forth dance that goes in this market.
As for your argument about oil, I'm going to make a separate post - I don't want to clutter this one and I need to tend to something else real quick.
Larry Gude
Strung Out
We're in the same book and same chapter now. So, getting on the same page;
Yes, I am not talking about resting money. I am talking about protecting it's value but not from the anticipated affects of inflation but from the real affect of what is going on overall.
If you have a billion dollars, you're Lehman or some fund or some public retirement steward, you started fleeing housing in '04, right? The benefit of resting it in treasuries is small, right? Safe but small. The penalties for this kind of money, non users, non suppliers, non industry players, being in oil were reduced if not totally removed in 2000. From 2000 to '04, housing was good.
So, starting in 04, what to do? No one was seeking investment capital. Capital, fleeing housing, was seeking investment, a decidedly dangerous place to be, agreed? So, oil. It's stable enough and BIG enough that the mob can just push it around absent regulation to keep that very thing from happening.
This is what drove me crazy about Bush; incentivize that money to get the hell out of oil and go stabilize housing. I have NO idea what he was thinking.
Double loser; it costs peoples pocket books AND the dough leaves the economy. Good lord, if we pizz it away in housing, at least it's home.
This seems to me to be what Obama is missing right now. All these guys are told how important the global economy is. Well, it ain't #### if the typical American can barely fill his tank.
On top of that, this KILLED GM. They made money on SUV's and pick ups. Oil killed that business and now Obama is going to finish them off just when people are thinking maybe it's safe to get something big again?
GM needs that. The economy needs this, cheap gas. To me, Obama needs it, too. Which is another discussion. Suffice it to say that the herd seems to me to be heading right back into oil and for the same reason; make a few safe bucks, better than treasuries. Maybe safer.
Tilted
..
You might change your mind about that.
I think there are two separate issues here. One about trading in oil, and how much speculation can artificially inflate the price. And, the other about the differences (or similarities) between how well gold prices are tied to fundamental factors and how well oil prices are tied to fundamental factors. I'll tackle the first issue first.
First, let me say that there is no doubt that speculation plays a role, sometimes a large role, in the pricing of oil futures contracts. This is true with any trade-able instrument - truth be told, it is the nature of a trade-able instrument. In the strictest since, all trading of futures is speculation, but some of this speculation is predicated on an actual need to acquire or sell the physical commodity, and some of it is not predicated on those actual needs. The former activity is technically hedging, and usually its primary goal is to stabilize the price that an entity pays/receives for a commodity. The later activity is what we generally refer to as speculation, and usually its primary goal is to make money. From the market's perspective, speculation's primary function is to provide the liquidity that the market needs to operate efficiently for all of the hedgers. Other dynamics aside, however much is needed should organic flow in and lubricate the spaces that need it at any given time. I won't get lost in that dynamic, because I suspect you can understand it.
Here's the the simple, yet poignant, reality of trading contracts - there always has to be a party on both sides of a trade. Let's discuss this in a cartoon-ish way for a minute, so that we can establish a common foundation on which to view the matter (just bear with me, I realize that you are not stupid
).A sold contract represents an obligation to deliver a certain quantity of oil at some date in the future. A bought contract represents an obligation to take delivery of a certain quantity of oil at some date in the future. Whenever a contract exists, both sides of it exist. When a buyer and a seller decide to make a contract, they effectively create an open contract by juxtaposing these opposing obligations against each other. Two exactly opposite halves are created out of nothingness, but their sum is exactly equal to nothing, so their creation need not have a tangible effect on the real world. The buyer and seller are mated by the market, because the buyer offers the highest unmatched price and the seller offers the lowest unmatched price. Once those halves are created, either party can trade their half and realize a financial gain or loss by selling it at a price different than the one they originally agreed to. But, the contract still exists, because the two halves haven't been put back together yet. We call that an 'open contract' - the parts of the contract haven't been put back together yet - when they are, they will become nothing again. All of the open contracts added together represent the 'open interest'.
Now, you don't actually have to have a need for oil, or oil you need to sell, in order to be one of the parties creating a contract. You can just pretend to - you create a contract with the opposing side, even though you never plan to deliver/take delivery of the oil. Both parties to a contract can just be pretending, or just one can, or neither can. Those pretending parties are the speculators. So, in theory, you could have an unlimited number of contracts created, even though there will ultimately only be a certain amount of oil delivered - there can be more 'open interest' than there is actual oil or need for oil.
But, here's the thing - all of that open interest must eventually be closed. If you actually have a need for the oil, you can close a buy interest by buying the oil (that's not really how it actually happens - but this is a cartoon-ish model). If you actually have oil to sell, you can close a sell interest by selling the oil. Any sell side of a contract can mate with any buy side of a contract - they don't have to be the halves that were created at the same time.
Now, if you don't actually have oil to sell, or don't actually want to buy oil, then you have to close your position by acquiring the other half of whatever open interest you have. You don't get a choice about this - if you sold a contract, you eventually have to buy a contract, so that you can put them together and make them go *poof*. (In order to trade on the exchange, you have to keep a certain amount of cash on account with them to cover a situation where you don't properly close your contracts - the rate changes based on the current pricing volatility, but it might be something like 20% of the price of the contract.)
Here is the essence of the effect of speculation. The only way that speculation can 'artificially' inflate the price of oil, is by buying a contract. This creates extra demand. A speculative buyer has to mate with a real seller, which creates extra buy interest with no extra sell interest to offset it. The real buyers still need to buy, but there are less real sellers relative to the them, so they have to pay more in order to entice more sellers into the game. Those new sellers might be real sellers, or they might be speculative sellers who got enticed in by the price being high enough. They might be some of the same people who were just speculative buyers. But here's the key, eventually the number of speculative buyers has to become equal to the number of speculative sellers. The open interest on both sides has to end up equal, and the actual deliverers of oil will always equal the actual receivers. The speculative interest can still have the net effect of increasing the price though, because for brief periods of time there can be more speculative buying than there is selling - and that can create an upward momentum that lingers, even when the number of speculative sellers catches up.
However - the higher the price rises, the less oil gets used (I'll get back to this in a minute), so the less real buyers there are. Also, higher prices bring out more real sellers (in practicality, the difference often affects when a potential real seller sells, not if). What eventually happens is that the 'artificial' effect of a surplus of speculative buyers, creates a small surplus of real sellers, relative to real buyers. So long as all the real sellers are on the same page, this dynamic can continue, and prices can continue to rise - but, but ... if some real sellers get scared that they can't sell their contract, because there is starting to be more real supply than real demand - and the price has gotten high enough that there aren't enough speculative buyers willing to take the chance and make up the difference - then some real sellers may be willing to take less, just to make sure they get their contract sold. The prices get so attractive to real sellers that they are happy to sell as much as they can, and now the speculative buyers have a problem. The whole process reverses itself, and those speculative buyers have to be speculative sellers in order to close their positions - and there is already a surplus of sellers, so the prices are going to be dropping.
These kinds of dynamics play out on multiple levels, and in multiple, varied time-frames - all overlapping and commingling with each other. It's a market - and very subtle forces are very intricately interwoven. But the overriding general dynamic is this - for every speculative buy which puts upward pressure on the oil price, eventually there has to be a speculative sell, which will put downward pressure on the oil price.
Speculation can move prices - but it can only do it by the amount, and for the period of time, that the real parties allow it to do so. At any time, they can call speculation's bluff, and seize on what they think is a good deal (whether they be a buyer thinking the price is low enough, or a seller thinking it is high enough). And, remember the collective desire of the real parties is neutral with regard to price. There are just as many buyers who want it to be lower, as there are sellers who want it to be higher. The only appreciable net effect of the real parties, is to want stability - that is what allows their businesses to operate most efficiently.
In their desire to assert control over the market, the real players have the fundamentals on their side. When it comes to calling the bluff of the speculators, they can find their confidence in the power of the reality of the supply or demand fundamentals. If there is way, way more oil on the market than is needed, and it is clear that demand won't grow fast enough to absorb it all, then a buyer can hang their hat on that and force the sellers to take less. The thing is, when the supply demand issues get kinda close, or it looks like they might get close in the future (because of increasing demand or something), then the real players might not have as much confidence to call the speculators bluff. The speculators can bully them into accepting their terms - because speculative money is, by its nature, bolder.
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Tilted
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The real player needs the trade - they need to buy the oil - or sell it - in order to operate their business. The speculator doesn't need anything, they just make money or lose it. They'd prefer to make it, but they wouldn't be speculators if they didn't have the stomach to lose it. So, it is their nerve, their chutzpah, that gives them a constant advantage - and the real players need extra ammo on their side (i.e. clear fundamentals and future expectations) in order to overpower the speculators. And, of course, it is possible for this dynamic to move the market either way - it's just as easy to be short oil speculatively as it is to be long it, if the fundamentals create the right opportunity (although the speculative influence is usually upward). The constant though, is that the speculator is the bolder player, and if the game is chicken - they are gonna win, when all other things are equal.
So, the point is this - yes, speculation can move prices. But, the movement of those prices has an effect on the fundamentals (higher prices increase supply and lower demand, and vice versa). And, if you move the fundamentals enough, the real players collect enough ammunition to tell the speculators to go fly a kite. (Speculators and real players are competing with each other - in general, one wants volatility and one wants stability. Even though there are members of each group that want prices to go up and members of each group that want them to go down - those members effectively cancel each other out.) Speculators can only move prices to the extent that they can scare the real players into being complicit, and the more they scare the real players, the more the real players get fundamental ammunition which gives them the courage not to be scared.
Now, here is why petroleum prices can be so volatile. The ability of real players to fend off the efforts of speculators, is dependent how much demand or supply change in response to price changes. Well, with oil, we have shown that it takes huge price increases to get consumers to significantly reduce their consumption. And, it takes huge price increases to get some producers to increase supply (as you well know - gas went to over $4 and we STILL did not open up more drilling in this country).
So, in part, we - individual citizens and collective government - are complicit in allowing oil prices to rise. If we responded more decisively to price fluctuations, then the market would be more sensitive to price fluctuations - and small movements here or there would shift the fundamentals enough to hand the advantage back to the real players - and we'd have relatively stable oil prices. But, when a gallon of gas goes from $1.89 to $2.05, most of us just complain - we don't really reduce our usage - we don't decide not to make that extra trip to McDonald's, we don't decide to car pool a little more, we don't turn the heat in our house down a few degrees, we don't decide to buy the Prius instead of the Mustang, we don't call our Senator and tell them to open up drilling or they can forget about getting our vote next time around. We do those things when the price of gas goes from $1.89 to $3.55. That is why the price goes from $1.89 to $3.35 - because that is how much it has to move to get people to adjust their usage and production enough, to shift the fundamentals enough, to give the real players enough ammunition, to have enough confidence, to tell the speculators to stick it where the sun don't shine.
Today, people's lifestyles are so intimately tied to their mobility, that they don't respond to price changes affecting that mobility as quickly as they respond to price changes in other parts of their lives. I'm not criticizing that - but it is what it is - and there is a price attached to it. Collectively, we are a player in the market, and we are complicit with all the other parties in allowing speculation to drive the ship at times.
Of course in this recent cycle, the whole landscape also shifted suddenly, with the realization that the global economy, and thus energy demand, was shrinking. The effect of that was the same as the effect of reduced usage would have been, it was just magnified and more sudden - that is why the oil crash was particularly violent.
Now, it is clear that the fundamentals are very bearish - we have plenty of oil to meet our demand in the near term. But, that wasn't completely clear a year ago. Yes, we had enough supply, and some surplus - maybe a million barrels a day, maybe 4 million. However, we thought that global demand was growing rapidly, and that supply couldn't possibly keep up - so that at some point in the future (a year, maybe 4), we wouldn't have as much oil as we needed. The market overreacts to that possibility, because the consequences are so daunting. The idea that a truck full of tomatoes might be stuck on the side of the road because the truck stop won't get a new supply of diesel for 2 days - or that an employee might not be able to get to work because their neighborhood gas station will run out of gas for a day - is very scary. The market appreciates the potential repercussions of that possibility.
So, when the fundamentals, or our future expectations, tell us that it might be possible in the near future, then the speculators can use that fear to beat the real players over the top of the head. The fear of it is so great, that the real players must be certain that it is a long way off, in order to take that weapon out of the hands of the speculators. Without reduced usage, that possibility was real in some people's minds early last year (whether or not it should have been is immaterial) - and the speculators used that to take a lot of money from us. But, at the same time, we allowed them to do it because we weren't willing to suck it up and make the usage sacrifices that would have made them impotent. By the time we were willing to do that, we were seeing the effects of a faltering economy anyway, and the speculators had already collected their fear tax.
Bottom line - we don't have to legislate speculators out of business - in fact they provide a needed function. We just have to have the discipline and foresight to limit their power over pricing - make them the modestly paid market lubricators that they are supposed to be. We should be more reasonable and realistic about how much we can afford to consume - and we should march on D.C. with pitchforks until they agree to tap every oil source we can imagine that we might have. If we won't do those things, then we deserve to have to hand over to others, the wealth that our forefathers spent a century accumulating.
I think I'll save the second issue for later. Got basketball to watch.
The real player needs the trade - they need to buy the oil - or sell it - in order to operate their business. The speculator doesn't need anything, they just make money or lose it. They'd prefer to make it, but they wouldn't be speculators if they didn't have the stomach to lose it. So, it is their nerve, their chutzpah, that gives them a constant advantage - and the real players need extra ammo on their side (i.e. clear fundamentals and future expectations) in order to overpower the speculators. And, of course, it is possible for this dynamic to move the market either way - it's just as easy to be short oil speculatively as it is to be long it, if the fundamentals create the right opportunity (although the speculative influence is usually upward). The constant though, is that the speculator is the bolder player, and if the game is chicken - they are gonna win, when all other things are equal.
So, the point is this - yes, speculation can move prices. But, the movement of those prices has an effect on the fundamentals (higher prices increase supply and lower demand, and vice versa). And, if you move the fundamentals enough, the real players collect enough ammunition to tell the speculators to go fly a kite. (Speculators and real players are competing with each other - in general, one wants volatility and one wants stability. Even though there are members of each group that want prices to go up and members of each group that want them to go down - those members effectively cancel each other out.) Speculators can only move prices to the extent that they can scare the real players into being complicit, and the more they scare the real players, the more the real players get fundamental ammunition which gives them the courage not to be scared.
Now, here is why petroleum prices can be so volatile. The ability of real players to fend off the efforts of speculators, is dependent how much demand or supply change in response to price changes. Well, with oil, we have shown that it takes huge price increases to get consumers to significantly reduce their consumption. And, it takes huge price increases to get some producers to increase supply (as you well know - gas went to over $4 and we STILL did not open up more drilling in this country).
So, in part, we - individual citizens and collective government - are complicit in allowing oil prices to rise. If we responded more decisively to price fluctuations, then the market would be more sensitive to price fluctuations - and small movements here or there would shift the fundamentals enough to hand the advantage back to the real players - and we'd have relatively stable oil prices. But, when a gallon of gas goes from $1.89 to $2.05, most of us just complain - we don't really reduce our usage - we don't decide not to make that extra trip to McDonald's, we don't decide to car pool a little more, we don't turn the heat in our house down a few degrees, we don't decide to buy the Prius instead of the Mustang, we don't call our Senator and tell them to open up drilling or they can forget about getting our vote next time around. We do those things when the price of gas goes from $1.89 to $3.55. That is why the price goes from $1.89 to $3.35 - because that is how much it has to move to get people to adjust their usage and production enough, to shift the fundamentals enough, to give the real players enough ammunition, to have enough confidence, to tell the speculators to stick it where the sun don't shine.
Today, people's lifestyles are so intimately tied to their mobility, that they don't respond to price changes affecting that mobility as quickly as they respond to price changes in other parts of their lives. I'm not criticizing that - but it is what it is - and there is a price attached to it. Collectively, we are a player in the market, and we are complicit with all the other parties in allowing speculation to drive the ship at times.
Of course in this recent cycle, the whole landscape also shifted suddenly, with the realization that the global economy, and thus energy demand, was shrinking. The effect of that was the same as the effect of reduced usage would have been, it was just magnified and more sudden - that is why the oil crash was particularly violent.
Now, it is clear that the fundamentals are very bearish - we have plenty of oil to meet our demand in the near term. But, that wasn't completely clear a year ago. Yes, we had enough supply, and some surplus - maybe a million barrels a day, maybe 4 million. However, we thought that global demand was growing rapidly, and that supply couldn't possibly keep up - so that at some point in the future (a year, maybe 4), we wouldn't have as much oil as we needed. The market overreacts to that possibility, because the consequences are so daunting. The idea that a truck full of tomatoes might be stuck on the side of the road because the truck stop won't get a new supply of diesel for 2 days - or that an employee might not be able to get to work because their neighborhood gas station will run out of gas for a day - is very scary. The market appreciates the potential repercussions of that possibility.
So, when the fundamentals, or our future expectations, tell us that it might be possible in the near future, then the speculators can use that fear to beat the real players over the top of the head. The fear of it is so great, that the real players must be certain that it is a long way off, in order to take that weapon out of the hands of the speculators. Without reduced usage, that possibility was real in some people's minds early last year (whether or not it should have been is immaterial) - and the speculators used that to take a lot of money from us. But, at the same time, we allowed them to do it because we weren't willing to suck it up and make the usage sacrifices that would have made them impotent. By the time we were willing to do that, we were seeing the effects of a faltering economy anyway, and the speculators had already collected their fear tax.
Bottom line - we don't have to legislate speculators out of business - in fact they provide a needed function. We just have to have the discipline and foresight to limit their power over pricing - make them the modestly paid market lubricators that they are supposed to be. We should be more reasonable and realistic about how much we can afford to consume - and we should march on D.C. with pitchforks until they agree to tap every oil source we can imagine that we might have. If we won't do those things, then we deserve to have to hand over to others, the wealth that our forefathers spent a century accumulating.
I think I'll save the second issue for later. Got basketball to watch.
Larry Gude
Strung Out
That's my point, right there. The changes in the 1922 grain act that occurred in 2000 lessened the cost to pure speculators in oil. The biggest owner of oil in New England in the winter of '07-'08 was Lehman Brothers, not anyone having anything to do with oil. Oil was trading some 30 times from out of the ground to into a boiler or car.
Oil consumption figures the last several years didn't justify the prices we saw. So, demand fell out of the equation. Supply figures easily met demand, so that part of the equation went out the window.
Pure speculators just kept buying and selling contracts and everyone jumped in as the fled housing.
If I read you closely, you're suggesting they didn't have that power.
Tilted
..
I must confess that I'm not familiar with the situation you are talking about. I'll have to do some reading to understand it better. If you know of any good sources for information on it, let me know.
They shouldn't have the ability to artificially inflate prices over a protracted period of time, absent fundamentals to support them. If they did, I don't understand the methods by which they did. With speculation inflated pricing, eventually there should be hedgers - actual product sellers - willing to take advantage of the high prices to move extra volume which will suppress prices. Are we talking about a phenomena that lasted multiple years, or just months - because speculators can definitely move prices over a period of months?
Without knowing the details of the situation I do have a couple of thoughts though. The things I describe assume the absence of collusion - with collusion all bets are off - and anything is possible.
Second, I suppose that it would be much easier to inflate prices for a specific finished product within a specific supply region. Perhaps speculators could effectively 'corner the market' on a commodity, within that context, and have tremendous control over pricing. That market would be less fungible, and more finite, and manipulation would be much more plausible.
So, I'm not sure what went on there or how it happened. But, I'd be interested in trying to figure it out.
With the general oil bubble we saw last year though, I don't think speculators would have been able to push prices so high, had it not been for genuine concern on the part of market analysts that we were approaching an oil supply squeeze. It wasn't imminent, but the idea that it might be around the bend created anxiety which speculators could use as a club.
Larry Gude
Strung Out
I'm not gonna be much good to you to find good links and reporting. This is all stuff I would comment on regularly over the last several years and provide links to where I read it. I don't save any of the links unless it's something I think I might want for later. If you look through politics and the endless threads I start about oil, you can find a good amount of links to stuff.
As I understand it, it was the simple constant volume of money coming in, competing for the contracts. You have a contract you bought in April at X that is due in 90 or however many days and it sold for X plus a few bucks, you bought another one the day after the first one, sold it a day after the last one and so on and so on. They weren't making much money on the trades, buying at $120, selling at $125, buying at $125, selling at $130 and so on, but it protected the money. It did earn something. The winners were the producers, the ones whose cost to get it out of the ground and on a tanker were pretty static and the losers was everyone on the other end, putting it in a car or heating oil tank.
It's hard to understand how oil really works -- oil really is the world's currency and a major tool of political control. All of the oil in the world is sold on two bourses -- one in London and one in the USA -- both owned by US companies. I'm not convinced that what we're told is really how things work. Plus Saudi Petro Dollars have long sustained the US deficit spending. The US brokered a deal with the Saudis decades ago that said we'll protect the House of Saud if they denominate oil only in US dollars and then deposit a large percent of the billions in annual revenues in US debt bonds and large banks. We also agreed to build them shining cities out of their sandy desert landscape. The system is commonly referred to as Petro Dollar Recycling. Apparently we offered Saddam Hussein a similar deal and he refused -- which is why he was eventually deposed after two wars.
The aforementioned part is why I say I'm not sure I can believe everything we're told about how the price of oil is set. That said, the financial news I've been studying makes these arguments:
-- As the dollar weakens, the prices of hard assets -- commodities -- oil -- will increase accordingly. Case in point -- the central bank yesterday announced a new plan to print $1T in order to save the economy. The USD index quickly dropped several percent and oil went up several percent -- within hours.
-- We are seeing supply destruction. As the price of oil falls below the cost to produce it, the producers have shut down operations. They're not going to produce at a loss. This includes operations like deep sea drilling, the oil shales in Montana, and the oil sands in Canada.
-- We're now past peak oil -- the point where the demand exceeds the maximum amount that can actually be extracted on a daily basis. The difference has been made up by alternate energies and some of the aforementioned sources like the Canada Tar Sands. Production from major oil fields is diminishing quickly. Canatrel (sp?) in Mexico is apparently down 25% last year. It is one of the world's few GIANTS. Everyone in the industry believes that the Saudis lie about their production (meaning they overstate what they have) -- and they do not allow audits (they have the worlds biggest GIANTS, followed by Iraq).
-- The current depression has caused a small reduction in demand which is offsetting the loss of production of the aforementioned sources, i.e. tar sands.
-- The sources of Sweet Crude are diminishing. Sweet crude is low in sulfur and requires minimal refining. Heavy crudes such as the stuff coming out of Venezuela and the tar sands requires a lot more refining -- and thus cost.
-- The conclusion is that as the dollar sinks and sinks, demands resumes (China and India), and the supply destruction further reduces supply, prices will again spike upward and eventually surpass the highs set last year.
I think we're in for a world of hurt in the coming years. If you're still relying on some gas guzzler and you have to travel a lot to survive, now is the time to go get something like a Prius. Once gas shoots back to $4+ and people realize it is here for good, there will be a 2 yr wait and a big premium. The Chevy Volt is due next year -- all electric. But the price is gonna be steep and as electricity prices spike upward, it may not be cheap to recharge it.
The aforementioned part is why I say I'm not sure I can believe everything we're told about how the price of oil is set. That said, the financial news I've been studying makes these arguments:
-- As the dollar weakens, the prices of hard assets -- commodities -- oil -- will increase accordingly. Case in point -- the central bank yesterday announced a new plan to print $1T in order to save the economy. The USD index quickly dropped several percent and oil went up several percent -- within hours.
-- We are seeing supply destruction. As the price of oil falls below the cost to produce it, the producers have shut down operations. They're not going to produce at a loss. This includes operations like deep sea drilling, the oil shales in Montana, and the oil sands in Canada.
-- We're now past peak oil -- the point where the demand exceeds the maximum amount that can actually be extracted on a daily basis. The difference has been made up by alternate energies and some of the aforementioned sources like the Canada Tar Sands. Production from major oil fields is diminishing quickly. Canatrel (sp?) in Mexico is apparently down 25% last year. It is one of the world's few GIANTS. Everyone in the industry believes that the Saudis lie about their production (meaning they overstate what they have) -- and they do not allow audits (they have the worlds biggest GIANTS, followed by Iraq).
-- The current depression has caused a small reduction in demand which is offsetting the loss of production of the aforementioned sources, i.e. tar sands.
-- The sources of Sweet Crude are diminishing. Sweet crude is low in sulfur and requires minimal refining. Heavy crudes such as the stuff coming out of Venezuela and the tar sands requires a lot more refining -- and thus cost.
-- The conclusion is that as the dollar sinks and sinks, demands resumes (China and India), and the supply destruction further reduces supply, prices will again spike upward and eventually surpass the highs set last year.
I think we're in for a world of hurt in the coming years. If you're still relying on some gas guzzler and you have to travel a lot to survive, now is the time to go get something like a Prius. Once gas shoots back to $4+ and people realize it is here for good, there will be a 2 yr wait and a big premium. The Chevy Volt is due next year -- all electric. But the price is gonna be steep and as electricity prices spike upward, it may not be cheap to recharge it.
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Larry Gude
Strung Out
And for pure economic reasons a $50,000 wundercar is not worth it. If you drive 24,000 miles a year and are getting an extra 20 mpg, that's only saving you 600 gallons a year v. a 20 mph car and at $4 a gallon that's only $2,400 which is only $20k over 8 years. That won't even justify the difference in the cost of the vehicles let alone the environmental impact of the new car and it's batts, the unknowns of major repairs or part replacements, etc.
Set aside the marketing of oil, the reason we use gas isn't because of some grand conspiracy but because of how efficient it is versus any known alternative that has a practical future ahead of it.
Tilted
..
I'd just like to add a few notes.
I completely agree that we will be in for a world of hurt in the future, if we don't take appropriate steps in the near term. And this spike in oil prices won't be largely a speculation driven bubble, which would have to burst after too long.
I completely agree that we will be in for a world of hurt in the future, if we don't take appropriate steps in the near term. And this spike in oil prices won't be largely a speculation driven bubble, which would have to burst after too long.