CNNMoney reports that the price of crude oil may finally have spiked– you know, if you look at it that way. "Crude oil prices retreated into the $126-a-barrel range Wednesday after dropping almost $5 a barrel from intraday highs to settle at $128.85 on Tuesday." While CNN is almost happy to make the link between dropping crude prices and "relief at the pump," it's worth noting, uh, what they note. "Gas prices have been pushed to record levels in the past year on the back of record oil prices. As the price of crude oil has more than doubled, gas prices have increased by almost a quarter." Anyone see an ominous disconnect there? Anyway and meanwhile, gas prices hit record highs for the 21st day in a row. "The nationwide average for a gallon of regular unleaded rose to $3.944, up 0.7 cent from $3.937 Tuesday." Detroit shouldn't pop the cork on those SUV-shaped champagne bottles just yet. Most analysts reckon that increased demand worldwide will prevent the price of crude from returning to last year's levels. Ever.
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Guess I’ll be spending more time in 6th gear this week.
“Most analysts reckon”
This is usually an indicator that you should bet on the exact opposite…
The price of oil has doubled in a year, but demand has not. There’s the disconnect.
The price of oil has doubled in a year, but demand has not. There’s the disconnect.
While there is indeed a lot of speculation, bear in mind that the changes in demand reflect exponentially in price.
To take another example, traffic on a road will be smooth 65mph at, say, 100 cars/mn. Add another 30 cars and the speed will decrease to 30mph, if the road capacity becomes overburdened.
Same deal with stocks/commodities. A 5% increase of demand, especially if it’s felt that it is a permanent increase, is likely to generate a higher increase in commodity prices
Prepare to be really pissed off.
http://seekingalpha.com/article/78950-oil-manipulations-exposed
Send to legislators.
In addition to what AKM just said, the market price traditionally takes longer to go down that it does to go up. In spite of all the bitching, domestic refiners have been taking it in the shorts for a year. Now they will make that money back. You might try buying stock in Valero or Marathon, as they will rebound from this while the more international players will take a smaller bump because they were making much of those “record profits” off of overseas refining recently.
gawdodirt,
That guy is an idiot. Most of his argument was completely invalid. The really interesting part is how he seems to think that a group of companies that control a small part of the world’s oil supply are somehow manipulating the price of oil without having any evidence other than the price is up. Seriously?
If you are going to link something, how about it not being some rant from a guy who thinks he knows something.
I don’t understand why we, most of us, expect ‘other’ people to behave to our advantage instead of their advantage. We’re almost all in it for the money as far as our work is concerned. Are we shocked when ball players accept millions to do what we loved to do as kids or when Madonna accepts millions for what she calls singing? No, so why the surprise and upset when Shell accepts $4+ for a gallon of gas when people are willing to pay it, or when a car dealer adds a ‘market adjustment’ on a hot selling car?
A 5% increase of demand, especially if it’s felt that it is a permanent increase, is likely to generate a higher increase in commodity prices
Based upon data from the EIA, during the last 27 years, there hasn’t been a single year in which global demand increased by that amount. Since 1984, demand has increased at an average rate of 1.6% per year. Compared to that figure, 2005 was an average year, and 2006 and 2007 had growth rates that were below average.
As the global economic slowdown kicks into gear, you can expect that growth rate to slow even more and possibly turn negative, as it was for a few years prior to 1984. Oil consumption correlates with prosperity, and the credit crunch is putting a freeze on that.
Speculators saw the post-9/11 world economic boom and the banner year for oil during 2004, when consumption grew at a record 3.4%, combined that with the jitters created by the Iraq war and the falling dollar, and got very excited about the whole thing. Since then, they have tripled the number of contracts being traded on the futures markets, and inflated the dollar value of those contracts almost eightfold as they have scrambled to make money on short-term price movements.
But speculators are not manipulators, at least not directly, because none of them are big enough individually to do much about it, and there are too many of them and too much competition between them for them to cooperate effectively. OPEC can conspire to control supply and they certainly try, but oil sources are too diversified for them to have more than a minor effect on the overall supply of oil.
The traders are ultimately followers, and has been the case with all of the other bubbles, those who keep playing until the bitter end will eventually get burned. But the end isn’t here yet, and I’m willing to bet that prices will go up before they go down. It’s gonna be a long, hot summer, with light traffic.
Phc101:
“It’s gonna be a long, hot summer, with light traffic.”
I’m liking the part about “light traffic”
I’m also noticing less speeding on the Interstate around my neck of the woods.
DT
In Vancouver, we’ll be paying over $1.40 a litre when the new carbon tax goes into effect. We pay 33 cents a litre already in taxes alone, so now another 2.4 cents. It’s ridiculous.
The good thing is people are driving the speed limit now or slower!
Pch101: you’re right. I used 5% as an example, as my firewall blocked The Economist Intelligence unit today (we have a very moody firewall…). a 5% year-to-year increase in oil consumption would indeed be gigantic.
Quite a few speculators have had to cover expectations that the price of oil would drop quite a lot – they have been taking positions relative to that, and with the recent hike, and the warning from IEA, etc – they got skittish and began buying oil in order to cover themselves against further increases.
Once that buying spree was over, the price settled at $126+ — now everyone is waiting for inventories, consumers’ behavior at the pump, and some audits of purported reserves.
Watch for more up than down …
gawdodirt:
“Prepare to be really pissed off.
http: //seekingalpha.com/article/78950-oil-manipulations-exposed
Send to legislators.”
I try to have an open mind, so I clicked on the link and read the article. Typical conspiracy stuff, plus Cheney eats puppies for breakfast (alive).
Best quote from the article:
“Unprovable doesn’t mean there isn’t any proof, folks…”
Well, that’s all you need to know.
Gasoline prices have been discounted by refiners for the last several months as demand slacked for gasoline. At the same time diesel has been in huge demand and since you can’t make diesel without making gasoline…
Also refiners have been pummeled by terrible crack spreads and their stock prices show it. Expect this to change and the pump price wit it.
Landcrusher,
Still working at Exxon?
Guys,
It’s all just more info.
If it’s what you want to belive; it’s good.
If not; it’s bad.
Or better yet; ludicrous.
How many are saying that McClellan is a whacko?
Only from one side.
Remember that it only took one guy from London making a couple of unauthorized trades to tank our stock market for a week.
But hey! Don’t confuse your argument with facts!
It takes a couple of weeks before a change in the price of oil translates to a change in the price of gasoline. A couple of weeks ago, the price of oil was skyrocketing; now it’s falling back (some). In a couple weeks, the price of gasoline will fall back in a similiar fashion, but it’s still rising due to the previous increase in oil prices.
Physician heal thyself…
Seeking Alpha is a fun site. You can find other authors there who argue the exact opposite position, claiming that the entire price is about supply constraints and end user demand, and has nothing to do with speculation. It’s a bit like this place, there is no rigid party line and what you read is the opinions of the individuals writing the articles.
The Seeking Alpha article cites a few good data points, but after putting two and two together, he ends up with fourteen. I would agree that the price doesn’t correlate with the supply and demand for oil, but there are several leaps of logic in that op-ed that don’t mesh.
Well for those of you who dismissed the alpha article, here is a Reuters article on Yahoo today. The second half of the article describes some of the manipulation of the market that is being investigated.
Those of you who want to continue to think that the oil market is dominated by guys wearing a halo and sporting a pair of wings trying to balance supply and demand for the betterment of mankind need to open your eyes.
I was in “denial” when the accusations against Enron began to fly in California. “No way could people manipulate a market like that” I said. Well I learned my lesson and it’s happening all over again in oil, gas, and other commodities.
http://news.yahoo.com/s/nm/cftc_probe_wsj_dc;_ylt=AqidTGZEgB0bQ9jIpmHcOQYDW7oF
Duplicate
I was in “denial” when the accusations against Enron began to fly in California. “No way could people manipulate a market like that” I said. Well I learned my lesson and it’s happening all over again in oil, gas, and other commodities.
Electricity was, and continues to be, a localized and regional market. Enron controlled the trading exchange, and could directly manipulate the result.
Petroleum is international. The storage facilities are widely held, and the traders don’t control the exchanges on which the futures are traded. There would have to have massive, widespread collusion across the planet in order to maintain long-term information distortions. I’m all in favor of investigating it, but this sounds more political than rational.
I noticed a few gas stations here in Denver drop their prices by a nickel today.
Like the wise man said “follow the money”. There may not be a single company or group of companies causing oil to spiral upward but with huge profits to be had everyone wants on the gravy train. One company didn’t cause the mortgage debacle but many companies bent and skirted or outright ignored the rules to profit regardless of the damage their actions would cause. Like the guys running D2.8 all that matters is their bonus.
Pch101:
Electricity was, and continues to be, a localized and regional market. Enron controlled the trading exchange, and could directly manipulate the result.
Excellent point. Also, unlike oil, electricity cannot be stored (in marketable amounts). For every ‘on’ switch, there is a generator spinning somewhere.
Also, electricity price does not vary with demand. There are generation plants whose sole purpose is to supply high demand days – and most consumers pay the same price on such days.
Alex,
No one here thinks the domestic oil chiefs are angelic. That’s a straw man. There are many who think they are not demonic though. There is an area in between.
The domestics do NOT control the price of oil, PERIOD. Can’t do it. If you want to blame an American, find some of the guys who helped form OPEC. They have been retired for years though.
OTOH, if you want manipulation, simply look at foreign governments and their nationalized oil companies. They could, and have manipulated prices in the past.
Most commodity products ARE manipulated in legal ways. The oil companies don’t push those tricks nearly as far as other commodity companies (like chips, paper, plastic, and many others) do. I have never seen an oil company announce a price increase in advance like is done in so many other industries.
There were many folks here in Houston who knew something was fishy at Enron long before the news broke, and even before it became a household name. No one I knew really new the dirt, but many of us had lots of suspicions. Not everyone was eager to get on the Enron account at my company, and those who jumped on that boat lost money and even jobs when it sunk. As a salesman, I heard how their commissions were being paid to the traders, and I couldn’t figure out how it worked until the end when we all learned about mark to market accounting and how they were playing their statements.
Lastly, The so called “deregulated” energy markets are anything BUT deregulated. They all seem to have hundreds of little regulations that are open to exploitation (except California, where the whole market was so badly designed a 5th grader could have played with it).
I believe the Serenity Prayer applied when it comes to fuel prices right now.
God grant me the serenity
to accept the things I cannot change;
courage to change the things I can;
and wisdom to know the difference.
Living one day at a time;
Enjoying one moment at a time;
Accepting hardships as the pathway to peace;
Taking, as He did, this sinful world
as it is, not as I would have it;
Trusting that He will make all things right
if I surrender to His Will;
That I may be reasonably happy in this life
and supremely happy with Him
Forever in the next.
Amen.
–Reinhold Niebuhr
Last week I wrote that we could see a drop in the price of oil as speculators seemed to be storing oil in very large tankers and “slow steaming” them to port in a bet that prices would rise. When everyone is on the same side of the trade, the time is right for a reversal. This is especially true when there is a large potential supply sitting on the sidelines.
This week we briefly look at this prediction, and perhaps even more ominous problems for commodities in general, at least in the short run. The new turn our attention to the euro. It will make for an interesting letter.
First off, oil dropped about 4% yesterday and is down almost $10 from its high only a week ago. Yet supplies of crude oil surprisingly dropped by 8.8 million barrels yesterday. Oil shot up on the news as both those who were short covered their bets and even more people piled into the long side of the trade.
But then the EIA report gave the rest of the story. It seems the shortfall “was due to temporary delays in crude oil tanker off-loadings on the Gulf Coast.” And as Dennis Gartman noted this morning, “officials at the Louisiana Offshore Oil Port (LOOP) said
that some crude oil tankers cancelled scheduled deliveries last week.” The owners of the oil in those tankers are now down about 6-7%, whether it is speculators in the pits or the actual trading companies.
I talked with George Friedman of Stratfor this morning, and he says that the supply of tankers is even tighter, which suggests there is even more oil on the seas looking for a home. Crude oil prices could be under pressure in the next few weeks and months as whoever holds that oil is going to want to get it onshore somewhere and out of very expensive tankers.
http://www.frontlinethoughts.com/article.asp?id=mwo053008