Oil down $30 in a month.

[alchemize]

Originally posted by: 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:

I knew it all along cause Dave predicted it for me.

 

[JS80]

Originally posted by: 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 I don't know what impact a sustained global slowdown would have on those previous estimates)?

I didn't think countries invested in oil futures, but if that's true, then naturally it pushes up the demand and hence price.

It's tricky in determining the true price of oil because of it's inelasticity. How much do I think it's worth? Probably $100. How much do I think it should cost? $20-40.

 

[mshan]

I thought they were starting to hold oil futures contracts as a temporary proxy for their dollar cash reserves, when the dollar seemed to be in free fall. Dollar seems is strengthening now, so maybe now they are taking profits and shifting those reserves into actual dollars (?)

Your example above almost sounds like the tech bubble and the new economy where the supposed fundamentals for the dot com companies had changed forever. You sound like you are really knowledgeable about the futures market, but my argument was that such a sustained speculative run up from 2002 would need to be supported by at least what seemed like a very plausible and compelling oil is going to run out type of story.

Very interesting commentary about how speculators may have fundamentally permanently changed the oil market and turned perception into reality. :Q

 

[CycloWizard]

Originally posted by: JS80
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.

The bottom line is that the refiner still thinks it's worth whatever they end up paying for it, which is the only thing that really matters. I'm still waiting for someone to explain why my previous post is incorrect. You seem to have a lot to say on the subject, so maybe you can help me understand.

 

[SleepWalkerX]

http://www.durangobill.com/OilChart.gif

Take at look at the trends, oil contracts went down about $30 in late 2006 - 2007 as well before shooting up. This is typical, prices don't shoot up in a straight line and shoot down in a straight line. They always have dips as they reach a particular trend or direction. What makes you think its not going to keep going up?

 

[Special K]

Originally posted by: 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.

So what causes the price to plummet like it's doing now? Did all of the speculative buyers suddenly decide they can't make any more money by turning around and selling the contracts?

 

[mshan]

I think the stock markets are only recently starting to price in a global economic slowdown, in particular starting to recognize that Asia might not be immune from the effects of this global subprime credit crunch..

Perhaps that, among lots of other factors, might be compelling speculators to take profits while the taking is good?

"Data abound indicating weakening of global economic growth. England is moving toward recession, Germany on August 14th is expected to post a negative reading for Q2 GDP, Japan is moving toward recession, and even China is showing signs of slowing." Link

"The Euro-zone sag to recession means the ECB is done with rate hikes. It may take well into 2009 for 4.1 percent Euro inflation to break, and the ECB to ease, but that event is no longer a theory but visible on the horizon. German bond yields are in free-fall in anticipation. As the Euro-zone tanks along with us, so do markets for Asian exports, and weakness there is daily more plain and will further undercut commodities." Link

 

[GTKeeper]

Originally posted by: Special K

Originally posted by: 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.

So what causes the price to plummet like it's doing now? Did all of the speculative buyers suddenly decide they can't make any more money by turning around and selling the contracts?

I think the smart speculators are slowly selling off their future's for 1 reason:

There is a bill in Congress that will hurt them, if passed.

I think also there are less and less speculators willing to pay a higher and higher price because that means risking billions of dollars.

I think there was also legislation passed having to do with the London Exchange that affected this as well.

 

[BurnItDwn]

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

What's wrong with trying to squeeze out a little bit more fuel efficiency with a simple common sense practice? It's obviously not going to solve everything, but even a 1% decrease in demand can make a nice dent.

 

[BarneyFife]

Well where is the drop at the pump? Its dropped 20% and my gas hasn't dropped .80 This is a farce. My gas was increasing .20 overnight because of a wind storm in Wisconsin and now that it drops by over $30, I have to wait weeks for it to drop a nickle.

 

[ElFenix]

Originally posted by: Special K
So what causes the price to plummet like it's doing now? Did all of the speculative buyers suddenly decide they can't make any more money by turning around and selling the contracts?

unless there is a built in profit from arbitrage, they're risk averse so they're going to stay out of a plummeting market.

Originally posted by: BarneyFife
Well where is the drop at the pump? Its dropped 20% and my gas hasn't dropped .80 This is a farce. My gas was increasing .20 overnight because of a wind storm in Wisconsin and now that it drops by over $30, I have to wait weeks for it to drop a nickle.

cost of input goods is not a direct determinant in the cost of the refined goods.

 

[Queasy]

Originally posted by: BarneyFife
Well where is the drop at the pump? Its dropped 20% and my gas hasn't dropped .80 This is a farce. My gas was increasing .20 overnight because of a wind storm in Wisconsin and now that it drops by over $30, I have to wait weeks for it to drop a nickle.

Gas price is always slower to fall than to rise. That's because gas stations have to use the money they make from today's sale to pay for the next shipment. They are operating on razor thin margins when it comes to gas sales...which is why everything is overpriced inside the store. Plus, what El Fenix mentioned.

Gas prices in my area have fallen .40 to .50 cents depending on the station.

 

[Duwelon]

Originally posted by: BurnItDwn

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

What's wrong with trying to squeeze out a little bit more fuel efficiency with a simple common sense practice? It's obviously not going to solve everything, but even a 1% decrease in demand can make a nice dent.

Nothing wrong with that at all. The problem with Obama however is that he comes off as a guy offering a 3% cut if "we all weren't such morons" when the price of gasoline has skyrocketed. Even if everyone in the world properly inflated their tires, or over inflated their times, and we saw a drop in 4% of demand, that's still a tiny dent in where gasoline prices ought to be.

What Obama said is perfectly fine, but in the context of the energy crisis he's a fool for even mentioning it without any other solution, as if that alone would bring gasoline back down to $2 or less a gallon.

 

[DealMonkey]

Here, let me dumb this down for people like this guy ^^^

THE ONLY REASON HE MENTIONED IT IS THAT A REPORTER ASKED HIM WHAT THE AVERAGE PERSON CAN DO ABOUT HIGH GAS PRICES.

What else besides conservation (i.e. tuning your car, keeping your tires properly inflated, driving less where possible, driving slower, adjusting your driving habits so you don't launch off the line at every red light) can the average consumer be responsible for?!?

NOTHING. Everything else is completely out of his/her hands.

Jesus Tapdancing Christ, people are dense. Do you even bother understanding the situation before you spout off with some retarded response?

 

[mshan]

Yeah, I read earlier today in these forums that he was just responding to someone's question (I don't get cable tv, so my news sources are OTA HDTV and the internet).

Is either of this clips the original question and answer?:
http://www.youtube.com/watch?v=XzZNP4tTfV0
http://www.youtube.com/watch?v=akjXqfvLu28 (the Britney Spears / Paris Hilton jab at the end of this clip is IMO actually quite funny)

edit: he said in second link that if every American inflated their tires to proper psi, we could reduce (American) aggregate demand by 3 - 4 %. If we are 23% of total global demand, that ain't chump change. :Q

 

[JS80]

Originally posted by: mshan
I thought they were starting to hold oil futures contracts as a temporary proxy for their dollar cash reserves, when the dollar seemed to be in free fall. Dollar seems is strengthening now, so maybe now they are taking profits and shifting those reserves into actual dollars (?)

Your example above almost sounds like the tech bubble and the new economy where the supposed fundamentals for the dot com companies had changed forever. You sound like you are really knowledgeable about the futures market, but my argument was that such a sustained speculative run up from 2002 would need to be supported by at least what seemed like a very plausible and compelling oil is going to run out type of story.

Very interesting commentary about how speculators may have fundamentally permanently changed the oil market and turned perception into reality. :Q

It is very similar to the tech bubble in it's pyramid-esque scheme of it. Except oil futures are backed by an actualy inelastic commodity that is being traded. However, traders of oil futures can only make more money (LONG) if there are MORE longs bidding up the price. If no new money comes in then the price stagnates. Investors don't like that and they will start to unwind the trade by closing the position out. Then as prices go down, short speculators could come in and drive the price down just as fast as it went up.

But oil running out is a story. It may or may not be true. We do know that US holds HUGE reserves off it's coast that is illegal to currently extract. This is political so I will pass on this. What I'm trying to say that it's all fear that was driving speculative money into the oil markets. Once they realized that this inelastic demand COULD decrease, prices start to fall (which is what's happening right now).

Yup, it's kind of sad to realize that some fucking hedge funds made out with a few billion dollars by "realizing the true value of oil" aka what is the world really willing to pay for it, and OPEC countries may work towards keeping the price up now that they know what the world can handle.

 

[JS80]

Originally posted by: 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?).

can you clarify? I don't understand your post.

 

[mshan]

Would that oil off our coasts be available in a year or two like queasy said, or would it take 10 - 15 years to get to market like my google search for "offshore drilling 10 years" might suggest (I chose 10 years because that's what I either saw or read somewhere).?

Also, in the second Obama clip I linked above, he said that the 3 - 4 % reduction in demand from everyone inflating their tires would be equivalent to the oil John McCain wants to drill for off our coasts. Is this true? (obviously, the right answer is probably a combination of both).

 

[Throckmorton]

Originally posted by: mshan
Would that oil off our coasts be available in a year or two like queasy said, or would it take 10 - 15 years to get to market like my google search for "offshore drilling 10 years" might suggest (I chose 10 years because that's what I either saw or read somewhere).?

10 years.

 

[CycloWizard]

Originally posted by: JS80
can you clarify? I don't understand your post.

How can alleged speculation lead to prices which are above the market value? Isn't the actual demand still setting the price if people are paying what the oil costs? It seems like assumptions of linearity are leading to this conclusion. I'm not an economist, but I have no reason to believe that the price of oil should depend linearly on demand.

 

[JS80]

Originally posted by: CycloWizard

Originally posted by: JS80
can you clarify? I don't understand your post.

How can alleged speculation lead to prices which are above the market value? Isn't the actual demand still setting the price if people are paying what the oil costs? It seems like assumptions of linearity are leading to this conclusion. I'm not an economist, but I have no reason to believe that the price of oil should depend linearly on demand.

Oil is relatively inelastic, so price can go up and down but demand remains the same.

 

[CycloWizard]

Originally posted by: JS80
Oil is relatively inelastic, so price can go up and down but demand remains the same.

I'm not trying to be obtuse, but are you assuming that demand is constant, therefore price should be constant? Demand is not constant, nor are expenses for oil producers. I know a lot more about oil flow assurance than I do about economics, so I'm asking how these speculators are causing the prices to rise beyond what the market dictates. At the end of the line, whoever is paying for the final product is paying what it's worth to them at that time. Isn't that the fundamental idea of economics?

edit: Is your idea is that speculators have somehow unfairly caused prices to rise? Maybe it's me that isn't understanding you.

 

[mshan]

Cyclowizard: I think you may need to view these oil futures contracts just like momentum growth stocks: traders and investors, not ultimate end users, are pricing them according to what the perceived future "earnings" will be. Global demand is bumping up uncomfortably against total available global production capacity, so this fundamental story, along with speculators piling on in a momentum stock type growth trade, can make the price of oil go parabolic. This may be changing if indeed there is a global economic slowdown in the works.

JS80: is the spot price of oil based upon demand for that last marginal barrel of oil?

 

[StageLeft]

I think you need to view these oil futures contracts just like momentum growth stocks: traders and investors, not ultimate end users, are pricing them according to what the perceived future "earnings" will be.

Exactly. It's like gold prices. Gold actually doesn't have much inherent value (used in a few applications but mainly it's just another form of money), but why can it swing substantially over short periods? It's not like more of it comes along, and demand is never so low that people just throw it in the trash, it all has to do with perceptions of value.

 

[CycloWizard]

Originally posted by: mshan
Cyclowizard: I think you may need to view these oil futures contracts just like momentum growth stocks: traders and investors, not ultimate end users, are pricing them according to what the perceived future "earnings" will be. Global demand is bumping up uncomfortably against total available global production capacity, so this fundamental story, along with speculators piling on in a momentum stock type growth trade, can make the price of oil go parabolic. This may be changing if indeed there is a global economic slowdown in the works.

JS80: is the spot price of oil based upon demand for that last marginal barrel of oil?

But the bottom line is that "speculation" can never make someone pay more for oil than they think it's worth. The grand conspiracy presented that the oil companies now have data on market inelasticity and that's somehow unfair doesn't make any sense to me. Everyone involved in the production, trading, and refining of oil should always get as high a price as they can for what they are selling. People were paying or not paying the asking price according to what they could afford, so what's the big deal?