Why is oil down?

[powayseller]

Why did oil prices drop so much?

The media says it was due to increasing inventory. They don’t say anything about demand going down, other than we are past the summer driving season. But I doubt that would make our demand fall enough to see such big oil price drops.

OPEC was pumping at capacity for many months, and supposedly we needed every barrel they could pump, so how was there an opportunity to store up this excess inventory?

Do you think the US had some traders bid up the price of oil for a few months, just to bring them down in time for the mid-term elections? People are not realizing prices are higher now than they were at the beginning of the year. They are just happy to see a price drop, so the game worked.

So my questions:
1) How could inventory have grown enough to cause such big price drops?
2) Is the drop in oil prices part of a political game, rather than a true change in demand and supply?

[vcguy_10]

Conspiracy theories again…

It’s very hard (or impossible) to manipulate prices like that. To answer your first question, inventories are up for reasons analagous to RE inventory: oil prices were going up so much and so fast in the recent past, that many companies (even non-oil companies!) got in the game.

It looked like a fool-proof way to make money: buy oil, then sell it at the same time in the futures market, for a nice, risk-free profit. Even after factoring-in the price of storage, these companies made a lot of money. But too many did the same thing at the same time, worsening the oil shortage (and high price) in the short-term. Up to a point, of course. Now everybody has a big chung of oil to unload, and prices are moving accordingly (downwards!).

Unlike SFHs, oil prices are not sticky on the way down. (Retail gasoline prices are coming down, though not as fast as crude). At the same time, demand is contracting as the economy enters a slower growth period.

This has nothing to do with the political cycle, IMO. Politicians perhaps wish they had that kind of power in international markets!

[powayseller]

vcguy_10, that makes sense.

Chris Johnston wrote about this also in his blog, and I just had another look today (see his post from today, Crude is getting crunched, and also his entry on 8/16).

[Roman]

From an interview on NPR this morning, the insight information was that 10-15% fluctuation (minus or plus in prices per barrel of oil) is linked to pure speculation. According to the oil analyst, (I don’t remember his name) is that the true value of a barrel of petrol, based on fundamental economics of supply & demand, should be in the low $50s . Hence – or + 10-15% is just pure speculation (specifically based on Geo-Political news…….or BAD news).

However, today’s price is somewhere around $61/ barrel. My guess is there should be some more room to future drops (as long as Iran and Middle East issues are being tamed).

According to the same report, OPEC is working hard to keep the production & price of oil in the low $60s (that is OPEC’s production optimum / equilibrium)

[gromit]

I thought it had something to do with Chevron’s recent discovery in the Gulf of Mexico…?

[qcomer]

PS,

The fundamental demand supply equation that you are talking about would fix the price of oil around $55 per barrel but oil was touching $80 and was bound to come back. The reasons are speculative money leaving after waiting for the bad geo political news or hurrican news, that never happened. The media actually says that oil is comign down as investors focus back on fundamentals of oil price and not on speculative geo political moves or hurrican forecasts. Nobody cares what that clown Ahmadinejad said in UN anymore. The focus has shifted.

The problem with high oil prices is that once people make arrangemnets for the high oil price, they don’t necessarily go back once the price comes down. e.g. I wouldn’t sell my hybrid, people won’t remove inuslations from homes, corporate fleets will not sell the hybrids they have bought for commute and R&D money spent by Ford/GM/Toyota to increase mpg won’t go down. This is why high oil prices are actually dangerous for OPEC.

The biggest factor though is that oil is down because of fear of expected slow down in US and maybe global economy. That is why I was surprised to see oil move up today. Maybe it was tehcnical.

[(former)FormerSanDiegan]

My take …

Fluctuation Happens.

[sdduuuude]

“The media says it was due to increasing inventory. They don’t say anything about demand going down”

Growing inventory can be as much a result of reduced demand as over-supply. Which is it? Only the market knows.

By the laws of supply and demand, when prices are high, demand falls off, except for short-term speculative demand, which falls off a little later – after the bubble builds.

Reduced “normal” demand due to high prices, coupled with the end of speculative demand can cause big price changes.

[no_such_reality]

There’s a couple reasons it is coming down:

The potential good news with the Gulf of Mexico discovery.
Opec maintaining volume.
Summer driving season ending.
Hurricane season not materializing for the Gulf oil industry (knock on wood)
Iran not escalating
Nigeria not escalating.
and Chavez while being more bombastic, continuing to ship oil.

All of these made oil nervous throughout the summer. All are slowly becoming non-issues or standard political posturing.

[ybc]

vrudny, good analysis. So are you still shorting oil related stocks? When do you think that you’d re-enter, and what type of stocks (integrated oil, services, refinery, sand-oil, etc)?

[SD Realtor]

PS and others. I have a friend who is fairly astute with regards to oil and natural gas. He goes to

http://www.eia.doe.gov

to find out about the official energy statistics and projections for the future. Unfortunately there are no real conspiracies. For instance for many many months the projections for natural gas were flat many years into the future.

There is a wealth of data over there, it just takes time and energy to sift through.

[Anonymous]

Politics, politics, politics. This is an election year. Faced with real estate disaster, oil disaster, war disaster, employment, inflation if not recession, … What can be controlled? Oil prices, c’mon we still have friends over there. If oil prices are lowered, what is the effect on the economy? Less overall inflation, so, don’t need to increase interest rates, so, housing stabilizes for a bit, … Just flirting at the brink of collapse.

[qcomer]

vrundy,
How did you buy RMB?

[rseiser]

vrudny,
since you are so well versed, I have a question on shorting. Since you have some account in China, could you think of using a foreign account to short QQQQs. This would sound like a safer way for me, since either the US stock market goes down, or the dollar drops (or both). This way you wouln’t have to fight an uphill battle against inflation, should it occur. I understand that put options, if they are available on foreign exhanges, wouldn’t be any better, since they might already price in the additional risk of dollars. But shorting on a foreign exchange should be easily possible. Any experience on that?

[rseiser]

Regarding the mutual funds investing in China. I guess, the common theme should be that they contain more domestic than international companies. Take for example Taiwan or Japan. It wouldn’t make sense to invest in multinational electronics or computer companies, since they have again their sales in the US, and will show lower earnings if the dollar drops.
Second, you probably have to pay higher taxes here, since the currency gain adds to your capital gains. With the bank-account in China, I suppose you can at least postpone the taxes on the currency gains, if not completely avert it when claiming gains in RMB (Sections 985 and 989(a)?). Or make sure you own them in an IRA.

[Author]

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