Speculation on oil futures

[trikkonceptz]

Some have hinted that the oil market has been affected so drastically because of the housing investors taking such a bath when there bubble burst, so it was kinda a shift in investment in order to recoup their loses.

Of course I could be and probably are wrong ..

[cfg83]

trikkonceptz -

Originally Posted by trikkonceptz

Some have hinted that the oil market has been affected so drastically because of the housing investors taking such a bath when there bubble burst, so it was kinda a shift in investment in order to recoup their loses.

Of course I could be and probably are wrong ..

I have been thinking along similar lines :

dot.com bubble ... pop!
... Enron style energy speculation bubble ... Pop!
... ... real estate bubble ... POP!
... ... ... the price of oil (bubble? ... POP?!?!?!?!)

CarloSW2

[echomodder]

There's only one way to bring this "oil dot.com" bubble down. DRILL FOR MORE OIL! Even comming out and saying it will help, due to the fact why should the oil producing country's pump out more oil. A barrel out today's worth $140 3 months from now it will be worth $160. 3 months to get $20 more dollars I'll take that bet. If they here that the US will be drilling for more oil than they will pump out more oil to try to sell it for the higher price and that will in turn lower the price of oil.

[trikkonceptz]

Originally Posted by echomodder

There's only one way to bring this "oil dot.com" bubble down. DRILL FOR MORE OIL! Even comming out and saying it will help, due to the fact why should the oil producing country's pump out more oil. A barrel out today's worth $140 3 months from now it will be worth $160. 3 months to get $20 more dollars I'll take that bet. If they here that the US will be drilling for more oil than they will pump out more oil to try to sell it for the higher price and that will in turn lower the price of oil.

Oh no ... that is not the answer, from what I have read, oil companies have not even begun to maximize the current oil contracts they have for drilling. And for one simple reason, there aren't enough refineries to convert crude. SO then make more refineries right? Well, it takes years, I believe 5 to complete a refinery then set it up and make sure its working at capacity.

So then why not increase production? Because strick laws monitor the production of oil, not its quantity, but the equipments maintenance. Pieces need to be shut down and serviced at specific intervals making any refinery less than 100% capable of making oil and gas, etc.

So having more reserves will not solve this, and building the facilities to refine will take more time than the economy can currently handle. There is currently alot of demand and no easy way to solve the problem. Heck do you think the suppliers will cut back on profit in order to help those of lesser means? How do you think Chavez can afford to keep the price of gas down so low locally? Because demand is so high everywhere else ...

[LostCause]

No one really knows the exact reason why oil is going up in price. It's all an almagamation of the falling dollar, supply not keeping up with demand, Middle East tension, supply disruptions, and speculation. Millions of analysts have knives, but not one of them knows how to cut the pie.

Drilling for more oil domestically will do little. The Alaskan oil fields at Prudhoe Bay, the largest ever discovered in the United States, came online after US production started declining. As it is, way more oil fields are being depleted around the world than are being discovered.

We either pay the price of reckless energy use today or tomorrow. I know many don't give a damn about future generations, but I say lets deal with the issue today. I think that giving modern society a sustainable energy infrastructure would be more impressive than our efforts to send man to the moon.

Here's to infinitely expensive oil...

- LostCause

[Krieg]

Carlos, good analysis there, but you can go back even further.

Maybe it all started with the '87 crash?

You have the Japanese stock market bubble, the Mexican peso crisis of '94, the Russian rubble crisis, the Asian financial crisis of '97, the dot com bubble, the real estate bubble, and now the commodity bubble.

[PA32R]

If there are people who need or want to hedge (protect themselves from falling or rising prices) there must be those who want to speculate. They cannot exist without one another. You might as well blame people boarding up their windows for causing hurricanes.

Speculators are the grease that lubricates the system whereby owners and prospective purchasers of commodities protect themselves from adverse price moves. If I want to, I can take a speculative position on either side - I can sell futures as well as buy them. Or, even more highly leveraged, I can buy a call option on a future, or buy a put option on a future. All of these are speculating. I can hedge my "long" position in oil (owning futures, expecting a price rise) by selling call options on my futures (selling someone the right to buy the future at a particular price - if the actual price goes down, he won't buy the future for which he has the option since he can get it cheaper on the spot market and I keep the option price; if the price goes up, I sell him the future, so my upside is limited by my hedging my future).

All of this, in theory, exists for the purpose of enabling producers and users of commodities to stabilize predictable prices for what they will need to sell/buy. The speculators make the market liquid.

There is a vast literature on the web, in your local Borders, and at the University Library in scholarly journals on why oil prices are so high. There's probably a little truth in all of the explanations. But one way to look at it is:

In the 1930's we had the Great Depression. This was a time when no one had money (dollars) and dollars were pegged to a commodity (gold). So as liquidity decreased, dollars became worth more (deflation). This can't happen now because no country's currency is linked to a commodity, rather the opposite. So, flip that. Say your "currency" is oil. Well, we are very likely in a huge economic contraction, so with oil as your currency, it becomes more and more valuable.

This is exacerbated to a certain extent by the fact that oil is priced in dollars, and the dollar is staggering against most currencies for a variety of reasons. Mostly that we are, both publicly and privately, basically insolvent. We exported our ability to produce anything real and we've used up our ability to extricate ourselves by using our natural resources. We're consuming those faster than we produce them. So, our ability to shore up our economy is minimal. Not to mention our trade deficit (hugely impacted by our need to import oil) and the spectacular level of foreign debt.

So, speculators are rightfully confident that purchasing oil on paper using leverage will pay off big time. But they aren't the cause of it. (By the way, I like to use parentheses).

[Duffman]

Originally Posted by PA32R

If there are people who need or want to hedge (protect themselves from falling or rising prices) there must be those who want to speculate. They cannot exist without one another.

There need not be speculation for this transaction to occur. Both parties can both be looking to protect their interests with long term contracts. An early payment for the seller can finance his operations, avoiding banks. The buyer is protected as his supply can not bought out from underneath him. Both parties can benefit from price stability as well.

[PA32R]

Originally Posted by Duffman

There need not be speculation for this transaction to occur. Both parties can both be looking to protect their interests with long term contracts. An early payment for the seller can finance his operations, avoiding banks. The buyer is protected as his supply can not bought out from underneath him. Both parties can benefit from price stability as well.

Possibly in principle, that is true. But such a market would be quite illiquid. There need to be plenty of ready buyers and sellers for all commodities and delivery dates for the pricing in the market to be efficient. Speculators provide that efficiency.

This is true in the stock market as well. The average person on the street when asked "what is the purpose of the stock market?" will say that it's to provide capital for corporations. While there is an element of that, if I go buy say, 10,000 shares of IBM, that provides no capital at all to IBM. I'm speculating that my return on the money I invest will exceed other places I might put it, or will balance my portfolio, or some other desired outcome. But I'm certainly not captializing IBM. Similarly, I can sell IBM short and speculate that the price will go down.

In a nutshell, a large group of buyers and sellers makes an efficient market, in the sense of reflecting available information and minimizing spreads.

[dremd]

Originally Posted by MazdaMatt

How about grounding a few USAF jets for a couple days. I figure one jet for one hour uses as much gas as one hypermiler for one year.

F-16.net - Fuel consumption

Looks like more fuel than I use. 700~900 gallons per hour empty.

However I have read that total use by defense is about 2% of our national use. However 2% is definitely significant.

However if they hypermiled those jets just a little, then it would matter more than all of us combined.