Am I getting this Oil thing right?

[EconProf]

Greekfire described the free market approach pretty well–and how it solves problems if we just let it alone to work.
The price system is also a signaling system. Higher prices encourages consumers to conserve at the same time it encourages suppliers to reallocate resources to produce more, plus come up with substitutes. Government interference thwarts the natural and healthy tendencies of both suppliers and demanders to eventually solve the problem.
Much of the current high world oil price can be attributed to government price controls in developing countries. China, India, Indonesia and many others have government-set prices that discourage conservation by consumers. I understand that Venezuela and Iraq have gasoline well under $1 per gallon. Of course their long lines of cars are pictured on our TV news coverage, but the dolt reporter never states what the government fixed the price of gas at. Also, how many Americans reading the news about electricity shortages and blackouts in Baghdad know that their electricity is not even metered? Sales of air conditioners there are high, but why should anyone take any electricity-conserving measures if it is free when it is on.

[Eugene]

From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:

The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.

For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.

Two points.

The scenario in which future price of a commodity is considerably higher than spot is called “contango”. Contango creates an opportunity to profit. You buy the commodity at spot, sell a future, store it, then deliver the commodity to the customer one or two months down the road. Your profit is equal to the difference between future and spot prices, less cost to store. Any contango situation will be rapidly corrected by the market because there are people always watching; if they see an opportunity to profit by buying a couple of futures and then renting a tanker to keep 100,000 barrels of oil for a month, they will do it. Inventory-building will go on until there’s no more profit to be made; either because spot and all futures prices equalize, or because the world runs out of cheap ways to store commodity and storage costs run too high.

There’s no evidence of contango in oil. Most of the time, spot prices lead the increases ahead of future prices. There’s also no evidence that anyone actively stores massive and increasing amounts of oil anywhere.

The second point is that oil demand curve is steep but not vertical. If speculators succeed in raising the price by 100%, demand will inevitably drop. With no changes at the supply end, you’ll discover that there is excess supply that has to go somewhere, maybe soaked up by investors with big oil storage capacities.

Oh, but you can say “hey, maybe that excess supply is still in the ground”? Maybe oil producing nations are holding back some of the oil for some reason. But then there’s no reason to blame futures speculators. OPEC could bring oil to $140 entirely on it’s own, by cutting production, or simply by not scaling up production as fast as needed by the global economy.

[Eugene]

From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:

The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.

For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.

Two points.

The scenario in which future price of a commodity is considerably higher than spot is called “contango”. Contango creates an opportunity to profit. You buy the commodity at spot, sell a future, store it, then deliver the commodity to the customer one or two months down the road. Your profit is equal to the difference between future and spot prices, less cost to store. Any contango situation will be rapidly corrected by the market because there are people always watching; if they see an opportunity to profit by buying a couple of futures and then renting a tanker to keep 100,000 barrels of oil for a month, they will do it. Inventory-building will go on until there’s no more profit to be made; either because spot and all futures prices equalize, or because the world runs out of cheap ways to store commodity and storage costs run too high.

There’s no evidence of contango in oil. Most of the time, spot prices lead the increases ahead of future prices. There’s also no evidence that anyone actively stores massive and increasing amounts of oil anywhere.

The second point is that oil demand curve is steep but not vertical. If speculators succeed in raising the price by 100%, demand will inevitably drop. With no changes at the supply end, you’ll discover that there is excess supply that has to go somewhere, maybe soaked up by investors with big oil storage capacities.

Oh, but you can say “hey, maybe that excess supply is still in the ground”? Maybe oil producing nations are holding back some of the oil for some reason. But then there’s no reason to blame futures speculators. OPEC could bring oil to $140 entirely on it’s own, by cutting production, or simply by not scaling up production as fast as needed by the global economy.

[Eugene]

From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:

The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.

For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.

Two points.

The scenario in which future price of a commodity is considerably higher than spot is called “contango”. Contango creates an opportunity to profit. You buy the commodity at spot, sell a future, store it, then deliver the commodity to the customer one or two months down the road. Your profit is equal to the difference between future and spot prices, less cost to store. Any contango situation will be rapidly corrected by the market because there are people always watching; if they see an opportunity to profit by buying a couple of futures and then renting a tanker to keep 100,000 barrels of oil for a month, they will do it. Inventory-building will go on until there’s no more profit to be made; either because spot and all futures prices equalize, or because the world runs out of cheap ways to store commodity and storage costs run too high.

There’s no evidence of contango in oil. Most of the time, spot prices lead the increases ahead of future prices. There’s also no evidence that anyone actively stores massive and increasing amounts of oil anywhere.

The second point is that oil demand curve is steep but not vertical. If speculators succeed in raising the price by 100%, demand will inevitably drop. With no changes at the supply end, you’ll discover that there is excess supply that has to go somewhere, maybe soaked up by investors with big oil storage capacities.

Oh, but you can say “hey, maybe that excess supply is still in the ground”? Maybe oil producing nations are holding back some of the oil for some reason. But then there’s no reason to blame futures speculators. OPEC could bring oil to $140 entirely on it’s own, by cutting production, or simply by not scaling up production as fast as needed by the global economy.

[Eugene]

From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:

The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.

For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.

Two points.

The scenario in which future price of a commodity is considerably higher than spot is called “contango”. Contango creates an opportunity to profit. You buy the commodity at spot, sell a future, store it, then deliver the commodity to the customer one or two months down the road. Your profit is equal to the difference between future and spot prices, less cost to store. Any contango situation will be rapidly corrected by the market because there are people always watching; if they see an opportunity to profit by buying a couple of futures and then renting a tanker to keep 100,000 barrels of oil for a month, they will do it. Inventory-building will go on until there’s no more profit to be made; either because spot and all futures prices equalize, or because the world runs out of cheap ways to store commodity and storage costs run too high.

There’s no evidence of contango in oil. Most of the time, spot prices lead the increases ahead of future prices. There’s also no evidence that anyone actively stores massive and increasing amounts of oil anywhere.

The second point is that oil demand curve is steep but not vertical. If speculators succeed in raising the price by 100%, demand will inevitably drop. With no changes at the supply end, you’ll discover that there is excess supply that has to go somewhere, maybe soaked up by investors with big oil storage capacities.

Oh, but you can say “hey, maybe that excess supply is still in the ground”? Maybe oil producing nations are holding back some of the oil for some reason. But then there’s no reason to blame futures speculators. OPEC could bring oil to $140 entirely on it’s own, by cutting production, or simply by not scaling up production as fast as needed by the global economy.

[Eugene]

From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:

The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.

For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.

Two points.

The scenario in which future price of a commodity is considerably higher than spot is called “contango”. Contango creates an opportunity to profit. You buy the commodity at spot, sell a future, store it, then deliver the commodity to the customer one or two months down the road. Your profit is equal to the difference between future and spot prices, less cost to store. Any contango situation will be rapidly corrected by the market because there are people always watching; if they see an opportunity to profit by buying a couple of futures and then renting a tanker to keep 100,000 barrels of oil for a month, they will do it. Inventory-building will go on until there’s no more profit to be made; either because spot and all futures prices equalize, or because the world runs out of cheap ways to store commodity and storage costs run too high.

There’s no evidence of contango in oil. Most of the time, spot prices lead the increases ahead of future prices. There’s also no evidence that anyone actively stores massive and increasing amounts of oil anywhere.

The second point is that oil demand curve is steep but not vertical. If speculators succeed in raising the price by 100%, demand will inevitably drop. With no changes at the supply end, you’ll discover that there is excess supply that has to go somewhere, maybe soaked up by investors with big oil storage capacities.

Oh, but you can say “hey, maybe that excess supply is still in the ground”? Maybe oil producing nations are holding back some of the oil for some reason. But then there’s no reason to blame futures speculators. OPEC could bring oil to $140 entirely on it’s own, by cutting production, or simply by not scaling up production as fast as needed by the global economy.

[jficquette]

[quote=EconProf]For every speculator who profited from the runup in oil prices, there was a seller. IOW, one speculator gained, another lost the same dollar amount.
That is why the politicians’ rant against “speculation” is simply a feint to divert our attention from the supply and demand fundamentals that have driven the price up. Those same politicians could favorably impact supply and demand via drilling, encouraging conservation, and other politically painful measures if they had the integrity to do so. [/quote]

Actually its not true that for every seller there is a buyer. For every contract sold their is one bought but one party could sell 1000 contracts to 1000 buyers.

This is how markets are worked over. Russian takes the money they get from Europe and buy oil futures with it. They don’t have to worry about delivery because they are also the shippers.

We send about $1.3 Trillion to oil producing countries yearly and a lot of that money ends up being used to buy more oil futures.

Another factor is the Wall Street firms are huge into oil contracts to offset the hits on sub prime. In fact, GS is rumoured to have over $80 billion in long positions in Oil. JP Morgan has leased storage facilites at the port of New York to actually accept delivery of oil.

Banks, and Wall Street firms are taking the free fed money and piling into commodities with it.
This is what happens when you have the fed and government manipulating the system. It will always create an excess in some other area.

John

[jficquette]

[quote=EconProf]For every speculator who profited from the runup in oil prices, there was a seller. IOW, one speculator gained, another lost the same dollar amount.
That is why the politicians’ rant against “speculation” is simply a feint to divert our attention from the supply and demand fundamentals that have driven the price up. Those same politicians could favorably impact supply and demand via drilling, encouraging conservation, and other politically painful measures if they had the integrity to do so. [/quote]

Actually its not true that for every seller there is a buyer. For every contract sold their is one bought but one party could sell 1000 contracts to 1000 buyers.

This is how markets are worked over. Russian takes the money they get from Europe and buy oil futures with it. They don’t have to worry about delivery because they are also the shippers.

We send about $1.3 Trillion to oil producing countries yearly and a lot of that money ends up being used to buy more oil futures.

Another factor is the Wall Street firms are huge into oil contracts to offset the hits on sub prime. In fact, GS is rumoured to have over $80 billion in long positions in Oil. JP Morgan has leased storage facilites at the port of New York to actually accept delivery of oil.

Banks, and Wall Street firms are taking the free fed money and piling into commodities with it.
This is what happens when you have the fed and government manipulating the system. It will always create an excess in some other area.

John

[jficquette]

[quote=EconProf]For every speculator who profited from the runup in oil prices, there was a seller. IOW, one speculator gained, another lost the same dollar amount.
That is why the politicians’ rant against “speculation” is simply a feint to divert our attention from the supply and demand fundamentals that have driven the price up. Those same politicians could favorably impact supply and demand via drilling, encouraging conservation, and other politically painful measures if they had the integrity to do so. [/quote]

Actually its not true that for every seller there is a buyer. For every contract sold their is one bought but one party could sell 1000 contracts to 1000 buyers.

This is how markets are worked over. Russian takes the money they get from Europe and buy oil futures with it. They don’t have to worry about delivery because they are also the shippers.

We send about $1.3 Trillion to oil producing countries yearly and a lot of that money ends up being used to buy more oil futures.

Another factor is the Wall Street firms are huge into oil contracts to offset the hits on sub prime. In fact, GS is rumoured to have over $80 billion in long positions in Oil. JP Morgan has leased storage facilites at the port of New York to actually accept delivery of oil.

Banks, and Wall Street firms are taking the free fed money and piling into commodities with it.
This is what happens when you have the fed and government manipulating the system. It will always create an excess in some other area.

John

[jficquette]

[quote=EconProf]For every speculator who profited from the runup in oil prices, there was a seller. IOW, one speculator gained, another lost the same dollar amount.
That is why the politicians’ rant against “speculation” is simply a feint to divert our attention from the supply and demand fundamentals that have driven the price up. Those same politicians could favorably impact supply and demand via drilling, encouraging conservation, and other politically painful measures if they had the integrity to do so. [/quote]

Actually its not true that for every seller there is a buyer. For every contract sold their is one bought but one party could sell 1000 contracts to 1000 buyers.

This is how markets are worked over. Russian takes the money they get from Europe and buy oil futures with it. They don’t have to worry about delivery because they are also the shippers.

We send about $1.3 Trillion to oil producing countries yearly and a lot of that money ends up being used to buy more oil futures.

Another factor is the Wall Street firms are huge into oil contracts to offset the hits on sub prime. In fact, GS is rumoured to have over $80 billion in long positions in Oil. JP Morgan has leased storage facilites at the port of New York to actually accept delivery of oil.

Banks, and Wall Street firms are taking the free fed money and piling into commodities with it.
This is what happens when you have the fed and government manipulating the system. It will always create an excess in some other area.

John

[jficquette]

[quote=EconProf]For every speculator who profited from the runup in oil prices, there was a seller. IOW, one speculator gained, another lost the same dollar amount.
That is why the politicians’ rant against “speculation” is simply a feint to divert our attention from the supply and demand fundamentals that have driven the price up. Those same politicians could favorably impact supply and demand via drilling, encouraging conservation, and other politically painful measures if they had the integrity to do so. [/quote]

Actually its not true that for every seller there is a buyer. For every contract sold their is one bought but one party could sell 1000 contracts to 1000 buyers.

This is how markets are worked over. Russian takes the money they get from Europe and buy oil futures with it. They don’t have to worry about delivery because they are also the shippers.

We send about $1.3 Trillion to oil producing countries yearly and a lot of that money ends up being used to buy more oil futures.

Another factor is the Wall Street firms are huge into oil contracts to offset the hits on sub prime. In fact, GS is rumoured to have over $80 billion in long positions in Oil. JP Morgan has leased storage facilites at the port of New York to actually accept delivery of oil.

Banks, and Wall Street firms are taking the free fed money and piling into commodities with it.
This is what happens when you have the fed and government manipulating the system. It will always create an excess in some other area.

John

[renterclint]

Okay-

Apparently this issue is much more complex than I originally gave it credit. Thanks to everyone who responded!

As I began to research the subject a little more, I discovered a couple web/newspaper sources claiming that the so-called “Enron Loophole” was effectively closed late in 2007.

What got me really thinking about the issue were several recent televised stories on oil speculation. The last of these recent segments layed out an elaborate time-line of how a certain Texas senator & a member of the CFTC conspired w/ Enron executives to create this loophole. I do not recall any of these stories explaining that the Enron Loophole had been closed. Funny…

[renterclint]

Okay-

Apparently this issue is much more complex than I originally gave it credit. Thanks to everyone who responded!

As I began to research the subject a little more, I discovered a couple web/newspaper sources claiming that the so-called “Enron Loophole” was effectively closed late in 2007.

What got me really thinking about the issue were several recent televised stories on oil speculation. The last of these recent segments layed out an elaborate time-line of how a certain Texas senator & a member of the CFTC conspired w/ Enron executives to create this loophole. I do not recall any of these stories explaining that the Enron Loophole had been closed. Funny…

[renterclint]

Okay-

Apparently this issue is much more complex than I originally gave it credit. Thanks to everyone who responded!

As I began to research the subject a little more, I discovered a couple web/newspaper sources claiming that the so-called “Enron Loophole” was effectively closed late in 2007.

What got me really thinking about the issue were several recent televised stories on oil speculation. The last of these recent segments layed out an elaborate time-line of how a certain Texas senator & a member of the CFTC conspired w/ Enron executives to create this loophole. I do not recall any of these stories explaining that the Enron Loophole had been closed. Funny…

[renterclint]

Okay-

Apparently this issue is much more complex than I originally gave it credit. Thanks to everyone who responded!

As I began to research the subject a little more, I discovered a couple web/newspaper sources claiming that the so-called “Enron Loophole” was effectively closed late in 2007.

What got me really thinking about the issue were several recent televised stories on oil speculation. The last of these recent segments layed out an elaborate time-line of how a certain Texas senator & a member of the CFTC conspired w/ Enron executives to create this loophole. I do not recall any of these stories explaining that the Enron Loophole had been closed. Funny…

[Author]

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