The Inconvenient Truths About Gas Prices

rmn ^ | May 31 | Robert Hardaway

[Toddsterpatriot]

Part of the speculation play is that BIG OIL has their own buyers, and they buy months and years out to secure the price for their refineries.

A big oil producer would most likely sell oil futures. A smaller refiner, with no production of their own would most likely buy futures.

[alrea]

Governments make more from the sale of gas than oil companies do.

[dynoman]

“Even non-delivery speculators are buying and selling goods.”

Churn and burn speculators do not take delivery nor do they ever have any intention of taking delivery, so what are the “goods”? Can’t be the commodity itself.

[Toddsterpatriot]

Lots of greedy hogs at the trough.

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.”

So you won’t tell me which market you would prefer? That’s funny!

[george76]

Any thoughts ?

[SAJ]

First, your assumption is wildly incorrect. Exchange and NFA figures have shown for years -- decades even -- that roughly 8 in 10 specs lose capital.

A spec's profit (or loss) comes directly from (goes directly to) another trader, less commissions and floor fees. Period. That's it. For every profit earned in trading futures or physicals, there is an equal loss suffered by another trader.

Specs can (and do) cause exaggeration of pre-existing mkt tendencies. This is a very common phenomenon usually called the ''bandwagon effect''. When a market is presently going up, specs many times jump on the perceived trend and push the market, temporarily, higher than it would otherwise have gone. And, when the buying orgy is over, said mkt moves down much faster and usually farther than it would have done otherwise.

However, a trend in the price of some good cannot be initiated by specs, bar extremely rare cases such as the Maine potato debacle of the 1970s. Why? Two reasons: 1) available capital relative to the size of the mkt, and 2) exchange and CFTC rules, particularly position limits. Trading's version of hell is better known as a CFTC 'complaint' against a trader and/or a brokerage for jacking around with accounts to (try to) avoid position limits.

Your notion of ''injecting extra costs'' is simply risible. If a spec buys October crude at $64 and sells it at $66 four days later, the $2000 per contract profit comes right out of the pocket of the trader who sold him the crude in the first place (or his successor trader who might have sold HIM some crude when the first trader covered his losing short position).

You and Joe Schwartz, filling up at the pump, aren't even in this equation, your phantasmagorical views to the contrary notwithstanding. The hypothetical successful spec in this example has had exactly zero effect on your wallet. Nor has the losing spec had any effect on your finances. How people come up with such notions is a mystery for the ages.

It's people just such as you, ignorant of the dynamic of markets and their operation, who enable Marxist clowns like Hitlery to spew her collectivist filth without getting laughed out of politics.

If you'd really like to know why energy mkts are so high (probably a dubious proposition) here it is. Drastically reduced worldwide daily excess capacity (known as 'ex-cap') plus an unfortunately timed (though quite inevitable) refining squeeze. That's it, no conspiracies, no speculators, no Bilderburgers, although the US gooberment gets an 'attaboy' here for mindlessly kowtowing to the envirowhacko dingbats in their ongoing desire to restrict production and refining.

[SAJ]

Quite a lot of us understand, Toddy m’man. However, getting it through the thick heads of the Marxists, the wannabees, the political class, the conspiracy theorists, and the other assorted anti-market vermin is, unfortunately, quite another story.

[SAJ]

He can’t. Don’t pick on the poor sod. He’s just stuck with his misperceptions until, maybe, someday when reality will bite him in the ass.

[SAJ]

Actually, crude and products crashed all through 1998, when OPEC was going through another round of fighting internally for mkt share. The Saudis, essentially, said ‘Screw you guys’, and opened the taps way wide for about 10 months.

[Toddsterpatriot]

Quite a lot of us understand, Toddy m’man.

I know, I meant on the thread to that point. I can lead an idiot to water, but I can't make him think. These clowns spout the same theme, futures buyers cause prices to rise, they never get to the point where the trader sells.

and the other assorted anti-market vermin is, unfortunately, quite another story.

Ding ding ding. If he doesn't understand it (and it's obvious he doesn't) it must be leeches sticking it to the little guy. He doesn't even understand the bid-ask spread and the depth of a market.

[Iwo Jima]

Are you still here?

You anti-Americans are so passe that I would have thought that you would have moved on from a pro-American site like this by now.

[Toddsterpatriot]

You anti-Americans

I'm anti-American because I understand markets and you don't? That's funny!

[Iwo Jima]

No, you're not anti-American because you don't understand markets (although, you clearly don't understand markets). You don't understand America because you think that all that America is about, is markets.

You don't understand that America is about much more than markets. We're about markets and so much more than your feeble mind will ever be able to comprehend.

And that's not funny.

[Toddsterpatriot]

No, you're not anti-American because you don't understand markets (although, you clearly don't understand markets).

Perhaps you'd show where my understanding of markets is incorrect?

You don't understand America because you think that all that America is about, is markets.

Wrong.

You don't understand that America is about much more than markets.

Wrong.

[dynoman]

“”Your notion of ‘’injecting extra costs’’ is simply risible. If a spec buys October crude at $64 and sells it at $66 four days later, the $2000 per contract profit comes right out of the pocket of the trader who sold him the crude in the first place (or his successor trader who might have sold HIM some crude when the first trader covered his losing short position).

You and Joe Schwartz, filling up at the pump, aren’t even in this equation, your phantasmagorical views to the contrary notwithstanding. The hypothetical successful spec in this example has had exactly zero effect on your wallet. Nor has the losing spec had any effect on your finances. How people come up with such notions is a mystery for the ages.”

I’m not buying. If non-delivery speculator pays more than 64 for the original October crude contract at 64 it will deliver at 64. If some greedy leech pays 66 and another 68 when October comes it will deliver at 68. Thus the crude that would have delivered at 64 without greedy leeches delivers at 68 instead a cost which trickles down to me and Joe Schwartz at the pump.

Over that last few years that has been the trend. You say it averages out, but I’m not too sure about that.

And if “Exchange and NFA figures have shown for years — decades even — that roughly 8 in 10 specs lose capital” they are obviously way dumber than I am.

[dynoman]

“So you won’t tell me which market you would prefer? That’s funny!”

The one with the least leeches, I’ve been saying that all along.

[dynoman]

"If you'd really like to know why energy mkts are so high (probably a dubious proposition) here it is. Drastically reduced worldwide daily excess capacity (known as 'ex-cap') plus an unfortunately timed (though quite inevitable) refining squeeze."

That is at direct odds with what the Shell CEO said;

"There’s no point in predicting the oil prices, because it tends to be a pretty bad prediction. Why is that? Because there are so many factors at play. What I will say is that as recently as this weekend, I looked at data showing that crude-oil stocks in factories around the world are very normal or even better than normal. It’s a bit of a mixed picture, but by and large, there is no physical shortage in the world. So there must be two reasons [for the current prices]—geopolitical tensions in the world, and the amount of nontraditional money like hedge funds moving into the oil market.”

“Are traders distorting the prices? Nobody knows the correlations there; it’s new territory. But some people estimate there is north of $100 billion in hedge-fund money in oil markets right now, which is of course significant. But that said, I’ve grown up in a physical world, and what I see from the physical world is that the lines of ships at refineries, and things like that, are OK.”

I think I will go with his analysis over yours.

[mongrel]

I’ve read through all these and I have a theory. Perhaps the best way to understand speculators is with 4x4 trucks on Ebay. There is a market of buyers and sellers which is fairly steady over the long haul. In the fall, prices go up and down in the spring. A speculator will buy in the spring and hold it until the fall to sell it again. The speculator will cause prices to rise in the spring when the prices are low, and cause them to drop in the fall. Overall, the speculator will contribute to equalizing the market and the average will remain about the same. So speculators actually flatten the market for the most part. When it works, speculators contribute to lower prices when market forces are on the high end and higher prices when market forces are on the low end.

The exception to this is when too many speculators get into the market and drive up prices. They can actually cause an opposite reaction and create even higher prices in the fall but there will always be a corresponding dropoff when the market is oversold. Am I close?

[dynoman]

More about why oil ran up to a high last summer;

"PRAGUE, April 20, 2006 (RFE/RL) -- RFE/RL spoke with Leo Drollas, the deputy director and chief economist of London's Center for Global Energy Studies.

RFE/RL: The price of oil continues to climb to record highs. Analysts say fears over the Iranian nuclear crisis is one of only several issues driving up prices. Iranian President Mahmud Ahmadinejad only strengthened those fears on April 19, when he said oil prices are still below their true levels. What's your take?

Leo Drollas: The first thing we must say is that these high prices are really paper prices, in a sense for paper oil, they're not the prompt market -- that is, for real wet barrels, as we call them. So they're obviously driven a lot by news and by sentiment, and they refer to oil that is bought and sold months ahead through paper contracts. And these prices move quite quickly on news, and the news is bad at the moment for oil because of the Iranian standoff, because of problems continuing in Nigeria, and many other factors in the market.

RFE/RL: So you're saying that, beyond fears over Iran or supply disruptions in Nigeria, the futures market is driving up prices?

Drollas: There's a lot of money that has come into the oil market over the last few years. The money that is now tracking commodity indices has increased from about $8 billion in 2001 to about $70 billion today. So we've got a huge influx of money into commodity-tracking indices, and a large part of those indices of course refer to oil. So we've got a lot of speculative money or hedge-fund money or other kinds of investors coming into oil, thinking they're on a roll now and that oil prices will forever increase. And in a sense, this tends to fulfill the prophecy, as long as the money keeps coming in.

RFE/RL: How does that drive prices, exactly?

Drollas: What tends to happen is that the futures prices, especially for months further out, tend to rise, and they create a difference between future prices for outer months and spot prices for oil, especially for "wet" barrels. And this differential encourages people to buy physical oil, and therefore, the pressure from the futures market is transmitted to the actual spot market for oil."

See how that increase in the delivered wet barrel ends up costing me and Joe Schwartz more at the pump.

"RFE/RL: But isn't capacity part of the problem as well, both in terms of the actual supply of oil and the fact that, particularly in the United States, refining capacity is down, with some refining facilities still not fully recovered from last summer's Hurricane Katrina?

Drollas: Well, this is the huge, unanswerable question as to what component of this price run-up is due to speculation, as we call it, or due to real fundamental factors. My own gut feeling is that maybe $15 [per barrel] or so at the moment is due to these kind of pressures from the futures market, from speculation if you like. In other words, the price should have been quite a bit lower than that, because there isn't actually a physical shortage of oil at this very moment."

[dynoman]

Now what happened last fall?

"Hedge funds get ahead of themselves

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By late summer, hedge funds and other investors had poured billions into long positions in oil, gasoline, natural gas and the rest of what traders call the "energy complex," all betting on a replay of the severe 2005 hurricane season that sent prices soaring in the wake of Katrina and Rita. But one day after oil reached a monthly high of $76.98 a barrel on Aug. 7, government meteorologists downgraded their hurricane forecast and cautioned that a repeat of 2005 was "unlikely."

That announcement, combined with the end of the summer driving season and a recalibration of the Goldman Sachs (Charts) commodity index that reduced the weighting of gasoline, prompted speculators to head for the exits even faster than they'd piled in.

According to Joel Fingerman of Chicago-based OilAnalytics.net, between the peak of $77 a barrel in August and the October low of just under $58, traders dumped nearly 40 million barrels (a 20 percent drop) from their long positions. The volatile gasoline market showed an even sharper decline - with traders cutting long positions from 32 million barrels in midsummer to just 1.7 million in October.

"Whatever you want to call it - speculators, fast money, hot money - a big part of the drop in crude that we've seen this year is because of selling by hedge funds," says Merrill Lynch technical analyst Mary Ann Bartels."

Now before you start crowing about how wonderful it is that non-delivery speculators drove the oil price down and it costs me less remember me and Joe Schwartz will never get the extra money we spent for gas last summer back when burn and churn speculation had padded the crude price by $15 barrel, that money is gone forever.

But me and Joe Schwartz better get ready because crude prices are on the rise again, and it could be for the same reasons as outlined in the above quotes.