Oil down $30 in a month.

[StageLeft]

Oil is trading at less than $116 now, down over 20%. For months many of us have said it was based in great part on bubble-like speculation, not backed by fundamentals and not maintainable. I know some will refute the recent downturn indicating a bubble with such points as slightly decreased demand, slightly stronger dollar, etc. but in the end there is only one thing that is responsible for a 20% drop so quick and it's the antithesis of what was responsible for the 20% gain so quickly, which was overly speculative, bubble-like hysterics buying. I heard a couple of weeks ago that Mexico locked in their futures when it was over $140 or something. if that's true, I bet they're happy as heck, they timed it perfectly.

 

[GTKeeper]

Yes, I bet that 30-40% of that 140/barrell price is due to speculation, if not more.

The amount of money in the future's markets for oil is ASTOUNDING.

 

[Genx87]

Well this all started with a higher than expected spike in "supply" due to lower "demand".

So yeah while speculation had a part in it. The speculators were able to do what they wanted because the supply was tight enough to allow it.

 

[JD50]

Wrong. Obviously everyone has begun inflating their tires properly, resulting in less demand and lower prices.

 

[dmcowen674]

Originally posted by: Genx87
Well this all started with a higher than expected spike in "supply" due to lower "demand".

So yeah while speculation had a part in it.

The speculators were able to do what they wanted because the supply was tight enough to allow it.

Topic Title: Oil down $30 in a month.

Topic Summary: How many here still think that $147 was based on fundamentals? Lol

There goes one.

Of course nevermind there was never any shortage or even a dip in oil. :roll:

 

[Cogman]

Originally posted by: JD50
Wrong. Obviously everyone has begun inflating their tires properly, resulting in less demand and lower prices.

With Nitrogen no less .

I wouldn't be surprised if more people are starting to drive slower and less often.

 

[Dari]

How many here still think that $147 was based on fundamentals? Lol

I think the speculators got the message when everyone, especially Congress, started talking about them.

 

[lupi]

The drop had nothing to do with the fact that it started about the same time that the executive order preventing further offshore drilling was lifted. It's the last 2-3 dollar drop that has occured since WalMart experienced a run on tire pressure gages that matters.

 

[2Xtreme21]

It's getting close to the first Tuesday after the first Monday in November.

 

[Queasy]

Originally posted by: lupi
The drop had nothing to do with the fact that it started about the same time that the executive order preventing further offshore drilling was lifted. It's the last 2-3 dollar drop that has occured since WalMart experienced a run on tire pressure gages that matters.

Yeah, the savings from those tire pressure gauges almost equals the gas mileage we lost from the ethanol mandate...

 

[mshan]

"Ask yourself this question: how can the U.S., as the world?s largest economy and consumer of 23% of the world?s daily production of oil be nearing recession, yet oil prices average $97 per barrel in the first quarter of 2008 and are now pushing toward $120 per barrel? How can this be? Is it speculation? It is hard to argue that speculators alone could push oil prices up nearly five-fold since 2002. Instead, we think there are larger factors at work, with the crux of the answers to the posed questions that the world?s daily production of crude oil is simply not growing to meet demand that continues to push upward globally. Millions of new customers are added each month in emerging markets, each incrementally sipping at the world?s thinning reserves. In other words, the oil price and supply/demand equations are no longer weighted as heavily toward American driving habits and the broader U.S. economy."

http://www.cambiar.com/cms_images/file_162.pdf (page 4; chart of of one mutual fund manager's projection global supply and demand on page 6).


There are obviously many factors that would influence price of oil, but recognition by the markets that the global subprime credit crunch is going to eventually even affect Asia may be reducing projected strain on global supply.

 

[Xavier434]

Originally posted by: Cogman

Originally posted by: JD50
Wrong. Obviously everyone has begun inflating their tires properly, resulting in less demand and lower prices.

With Nitrogen no less .

I wouldn't be surprised if more people are starting to drive slower and less often.

I can't speak for anywhere else, but here in South Florida I never hear anyone being concerned about their tire pressure any more than usual, they are driving pretty close to the same amount as they were before, and they are speed demons as always. I believe that there are people out there who are doing all of these things in order to be more conservative, but I don't believe that they are doing it nearly enough to justify a 20% decrease.

 

[Dari]

Originally posted by: Xavier434

Originally posted by: Cogman

Originally posted by: JD50
Wrong. Obviously everyone has begun inflating their tires properly, resulting in less demand and lower prices.

With Nitrogen no less .

I wouldn't be surprised if more people are starting to drive slower and less often.

I can't speak for anywhere else, but here in South Florida I never hear anyone being concerned about their tire pressure any more than usual, they are driving pretty close to the same amount as they were before, and they are speed demons as always. I believe that there are people out there who are doing all of these things in order to be more conservative, but I don't believe that they are doing it nearly enough to justify a 20% decrease.

They're joking.

 

[Xavier434]

Originally posted by: Dari

Originally posted by: Xavier434

Originally posted by: Cogman

Originally posted by: JD50
Wrong. Obviously everyone has begun inflating their tires properly, resulting in less demand and lower prices.

With Nitrogen no less .

I wouldn't be surprised if more people are starting to drive slower and less often.

I can't speak for anywhere else, but here in South Florida I never hear anyone being concerned about their tire pressure any more than usual, they are driving pretty close to the same amount as they were before, and they are speed demons as always. I believe that there are people out there who are doing all of these things in order to be more conservative, but I don't believe that they are doing it nearly enough to justify a 20% decrease.

They're joking.

Damnit! That's strike two against my sarcasm meter this week.

 

[CycloWizard]

Let's see... The price went to x1 and y1 gallons of gas were sold. Then the price went up to x2 and y2 gallons of gas were sold. Now the price came down to x3 and y3 gallons of gas will be sold. Obviously, y represents the amount of gas that people are willing to buy at price x, unless there is coercion involved. Maybe someone can explain to a simpleton how "speculation" affects this picture, or why a 4% change in demand must be accompanied by a 4% change in cost (i.e. why must the market be linear?).

 

[JS80]

Originally posted by: mshan
"Ask yourself this question: how can the U.S., as the world?s largest economy and consumer of 23% of the world?s daily production of oil be nearing recession, yet oil prices average $97 per barrel in the first quarter of 2008 and are now pushing toward $120 per barrel? How can this be? Is it speculation? It is hard to argue that speculators alone could push oil prices up nearly five-fold since 2002. Instead, we think there are larger factors at work, with the crux of the answers to the posed questions that the world?s daily production of crude oil is simply not growing to meet demand that continues to push upward globally. Millions of new customers are added each month in emerging markets, each incrementally sipping at the world?s thinning reserves. In other words, the oil price and supply/demand equations are no longer weighted as heavily toward American driving habits and the broader U.S. economy."

http://www.cambiar.com/cms_images/file_162.pdf (page 4; chart of of one mutual fund manager's projection global supply and demand on page 6).


There are obviously many factors that would influence price of oil, but recognition by the markets that the global subprime credit crunch is going to eventually even affect Asia may be reducing projected strain on global supply.

It's VERY easy to argue that speculators alone could push oil prices up nearly five fold - the money flow in the futures market has grown 10x in that time AND futures accounts are based on leverage. 10x money flow x 10x leverage = 100x more money trading futures.

Bottom line is the fundamentals HAS NOT changed. The futures pyramid scheme will be over once the money flow starts to be negative. Futures market is a ZERO-SUM GAME so it acts like a pyramid scheme. Once NEW money dries up, prices plummet.

 

[mshan]

So you're saying oil is fundamentally worth about $20 / barrel?

There should be speculators on the other side of the trade, and if fundamentals were as you assert, those short sellers should have the upper hand and significantly corrected price more in line with true supply and demand sometime within the last 6 years.

I am not saying that speculation has played a role in driving up oil prices, but it is not responsible for all of the multi-year price rise (from watching previous commentary on CNBC, I get the impression that fair market value of oil should be between $80 - $100, based upon recent fundamentals).

 

[Special K]

Originally posted by: JS80

Originally posted by: mshan
"Ask yourself this question: how can the U.S., as the world?s largest economy and consumer of 23% of the world?s daily production of oil be nearing recession, yet oil prices average $97 per barrel in the first quarter of 2008 and are now pushing toward $120 per barrel? How can this be? Is it speculation? It is hard to argue that speculators alone could push oil prices up nearly five-fold since 2002. Instead, we think there are larger factors at work, with the crux of the answers to the posed questions that the world?s daily production of crude oil is simply not growing to meet demand that continues to push upward globally. Millions of new customers are added each month in emerging markets, each incrementally sipping at the world?s thinning reserves. In other words, the oil price and supply/demand equations are no longer weighted as heavily toward American driving habits and the broader U.S. economy."

http://www.cambiar.com/cms_images/file_162.pdf (page 4; chart of of one mutual fund manager's projection global supply and demand on page 6).


There are obviously many factors that would influence price of oil, but recognition by the markets that the global subprime credit crunch is going to eventually even affect Asia may be reducing projected strain on global supply.

It's VERY easy to argue that speculators alone could push oil prices up nearly five fold - the money flow in the futures market has grown 10x in that time AND futures accounts are based on leverage. 10x money flow x 10x leverage = 100x more money trading futures.

Bottom line is the fundamentals HAS NOT changed. The futures pyramid scheme will be over once the money flow starts to be negative. Futures market is a ZERO-SUM GAME so it acts like a pyramid scheme. Once NEW money dries up, prices plummet.

Why are the actual refineries and companies who take physical possession of the oil forced to buy oil at the over-inflated speculated price?

If the futures price doesn't reflect true supply and demand, then why can't people who are interested in buying and selling physical oil do it at its true fundamental price?

Basically, why are companies who want to buy physical oil forced to do so through a futures contract? Why not just buy the oil directly and avoid buying contracts that are influenced by the whims of traders?

I've always seen futures as side bets made by people who have no intention of actually taking delivery of the oil. I don't understand why the side bets should affect the price for people who actually want to purchase the physical oil. One analogy I would use would be as follows:

Lets say someone sets up a website where you can place bets on the future price of milk. All you need is someone to take the opposite side of the bet. We can make as outrageous of a bet as we want, but it's still not going to affect the price people pay when they actually go to buy a gallon of milk. That price would ultimately be determined by fundamentals. Why is that not the case with oil?

 

[JS80]

Originally posted by: mshan
So you're saying oil is fundamentally worth about $20 / barrel?

There should be speculators on the other side of the trade, and if fundamentals were as you assert, those short sellers should have the upper hand and significantly corrected price more in line with true supply and demand sometime within the last 6 years.

I am not saying that speculation has played a role in driving up oil prices, but it is not responsible for all of the multi-year price rise (from watching previous commentary on CNBC, I get the impression that fair market value of oil should be between $80 - $100, based upon recent fundamentals).

There doesn't have to be short sellers. In fact shorts probably started to enter at $120. The sell side of the contracts from the ride up from $40 has been physical sellers. Most of the speculative money was LONG.

Yes, I actually do believe Oil could be worth $20-$40. Think about a world without the futures market. Oil producers would have to enter into long term contracts with countries that have huge leverage over them (i.e. US). In these scenarios the pricing power lies with the buyer, especially considering there is no fluid global marketplace.

But then enter the short term shocks. Because the market is inefficient, there is risk for short term shocks to supply and in turn shocks in pricing (for whatever reason).

So in order to create a more fluid and liquid market comes the invention of the futures market. This helps alleviate much of the volatile shocks (but of course there is still volatility), and even helps raise capital for new exploration because profits can now be more secure.

Then enter leveraged speculation. The market now realizes that OIL DEMAND IS INELASTIC! OMG people, we can just pump money into futures and push the price up and make money because people have no choice, demand won't go down! We'll push the price up as much as we can until it starts to hurt the economy. THIS IS WHY OIL PRICES WILL NOT COME DOWN BACK TO pre 2002 prices. Oil producing countries now realize HOW inelastic the demand for oil is.

Before they were afraid that 100% increase of oil from $20 to $40 would cripple the economy. Now they realize that oil can trade $100-140 without crippling the economy.

They can ban speculation NOW, but the oil producers now have the data they need. They can set up their own futures market and just prop up oil prices. It's too late.

 

[mshan]

Oil seller would wisely sell to the highest bidder, whether that is a speculator (or country or other entity that has decided to hold dollar reserves in oil futures, rather than a dollar that until recently appeared to be in free fall) or an oil refiner who is actually going to use the oil; they don't care that that contract is going to be sold to someone else before they actually have to take delivery.

The closing gap between available remaining supply and current demand has been closing, so that would allow speculators to pile on and drive up the price, but doesn't make sense that they could cause a 500% sustained increased in oil price, if future fundamentals didn't support their side of the trade.

 

[mshan]

"Now they realize that oil can trade $100-140 without crippling the economy."

??

 

[JS80]

Originally posted by: Special K

Originally posted by: JS80

Originally posted by: mshan
"Ask yourself this question: how can the U.S., as the world?s largest economy and consumer of 23% of the world?s daily production of oil be nearing recession, yet oil prices average $97 per barrel in the first quarter of 2008 and are now pushing toward $120 per barrel? How can this be? Is it speculation? It is hard to argue that speculators alone could push oil prices up nearly five-fold since 2002. Instead, we think there are larger factors at work, with the crux of the answers to the posed questions that the world?s daily production of crude oil is simply not growing to meet demand that continues to push upward globally. Millions of new customers are added each month in emerging markets, each incrementally sipping at the world?s thinning reserves. In other words, the oil price and supply/demand equations are no longer weighted as heavily toward American driving habits and the broader U.S. economy."

http://www.cambiar.com/cms_images/file_162.pdf (page 4; chart of of one mutual fund manager's projection global supply and demand on page 6).
There are obviously many factors that would influence price of oil, but recognition by the markets that the global subprime credit crunch is going to eventually even affect Asia may be reducing projected strain on global supply.

It's VERY easy to argue that speculators alone could push oil prices up nearly five fold - the money flow in the futures market has grown 10x in that time AND futures accounts are based on leverage. 10x money flow x 10x leverage = 100x more money trading futures.

Bottom line is the fundamentals HAS NOT changed. The futures pyramid scheme will be over once the money flow starts to be negative. Futures market is a ZERO-SUM GAME so it acts like a pyramid scheme. Once NEW money dries up, prices plummet.

Why are the actual refineries and companies who take physical possession of the oil forced to buy oil at the over-inflated speculated price?

If the futures price doesn't reflect true supply and demand, then why can't people who are interested in buying and selling physical oil do it at its true fundamental price?

Basically, why are companies who want to buy physical oil forced to do so through a futures contract? Why not just buy the oil directly and avoid buying contracts that are influenced by the whims of traders?

I've always seen futures as side bets made by people who have no intention of actually taking delivery of the oil. I don't understand why the side bets should affect the price for people who actually want to purchase the physical oil. One analogy I would use would be as follows:

Lets say someone sets up a website where you can place bets on the future price of milk. All you need is someone to take the opposite side of the bet. We can make as outrageous of a bet as we want, but it's still not going to affect the price people pay when they actually go to buy a gallon of milk. That price would ultimately be determined by fundamentals. Why is that not the case with oil?

The answer is because all the physical sellers are selling their contracts at the futures market, the physical buyers must also (i.e. there is no direct buy market). But your question is a VERY GOOD one, one which I've asked around and got spotty answers to. It could be very well that the futures market is mostly speculators and true physical trading could be done else and pricing at a different price.

BUT NO ONE KNOWS THE ANSWER BECAUSE THE FUCKING FUTURES MARKET KEEPS TRADING ANONYMOUS!

 

[JS80]

Originally posted by: mshan
"Now they realize that oil can trade $100-140 without crippling the economy."

??

Still positive global GDP.

 

[JS80]

Originally posted by: mshan
Oil seller would wisely sell to the highest bidder, whether that is a speculator (or country or other entity that has decided to hold dollar reserves in oil futures, rather than a dollar that until recently appeared to be in free fall) or an oil refiner who is actually going to use the oil; they don't care that that contract is going to be sold to someone else before they actually have to take delivery.

The closing gap between available remaining supply and current demand has been closing, so that would allow speculators to pile on and drive up the price, but doesn't make sense that they could cause a 500% sustained increased in oil price, if future fundamentals didn't support their side of the trade.

This is how the futures market works:
B = Buyer
SB = Speculative Buyer
S= Seller

S comes in offering Oil at the beginning of the month at $30.
SB comes in quickly and buys at $30.
SB offers for $35.
SB2 buys for $35.
SB2 offers for $40.
SB3 buys for $40.
...
...
...
SB40 offers for $100
B buys for $100.

What would the price have been if there were no speculative buyers? $30.

This isn't exactly how it works in the real world, but it's a VERY SIMPLE illustration to show up speculation does indeed push prices past what it could have been at. Plus "true value" of an inelastic good is very tricky.

 

[mshan]

Do you think the run up above $100 is largely due to other countries and entities holding their dollar reserves temporarily in oil futures contracts instead of actual dollars when the dollar appeared to be in free fall? (with speculators piling on to what they see as a good momentum trade)?

And if the fundamental way that oil is bought and sold has permanently changed, do you still think that oil is worth $20 - $40? (commentary I've seen from various guests on CNBC seemed to suggest somewhere in the $80 - $100 as probably basically reflecting supply and demand, though that commentary is at least a month or two ago, and I don't know what impact a sustained global slowdown would have on those previous estimates)?