Speculation on oil futures

[Krieg]

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

Gives new meaning to the phrase "pulse and glide".

[nascarnation]

Some excellent thoughts here.
I don't believe "speculators" can affect the price of a commodity over an extended period of time, because they do not take possession/consumption of a commodity, only ownership of it or the rights to purchase it.

Right now, speculation is just a convenient target for politicians in an election year scrambling to avoid blame.

[Bullockracing]

Originally Posted by tjts1

The fact of the matter is total world oil output has been flat since the first quarter of 2006 while oil consumption has increased relentlessly with the industrialization of China and India. We're not running out of oil. Demand is simply outrunning supply.

+1

We Americans buy everything as cheap as possible (think Wal-Mart, and from China usually) and as China becomes more industrialized, they need more oil to fuel their industry to feed our shopping habits...

[ALS]

In the last 48 hours oil has dropped over $8 per barrel. I didn't check the exact drop but gasoline has dropped between 15 cents and 20 cents per gallon.
Then right after the close what pops up on the wires but a puff piece from JP Morgan saying oil will not drop below $130 a barrel this summer.
Excuse me but weren't the guys at a competing bank saying we would see $150 plus by August. I wonder how many call contracts these bankers are sitting on at the moment. If oil futures dump to $100 a barrel, someone is going to take a major bath.

JPMorgan Says Oil to Remain Above $130 a Barrel Through Summer

By Robert Tuttle

July 8 (Bloomberg) -- Oil prices will remain above $130 a barrel through the end of summer and above the ``$115 level'' through the year, JPMorgan Chase & Co. analysts said in a report.

Oil rose to a record $145.85 on July 3 as global crude stockpiles, 67 million barrels below year-ago levels, have declined, the analysts said. Strife in Nigeria and concern about Iran's nuclear program have also supported oil's climb, while Saudi Arabia's pledge last month to increase oil production was ``modest,'' the analysts said.

``With the $150 in easy reach and a significant number of outstanding August WTI call options at that strike price, it seems almost a certainty ahead of the July 22 expiry,'' analysts Scott Speaker, Mark Gravener, Sung Yoo and Kristi Jones said in a report released yesterday.

Oil for August delivery fell $5.12, or 3.6 percent, to $136.25 a barrel at 2:20 p.m. on the New York Mercantile Exchange today. The contract for August delivery expires on July 22.

``We will likely see some minor corrections in the interim,'' the analysts said.

[BetsyBio]

Thanks for all the great replies. I was on digg today and found a great article about what led up to our having such hi gas prices and other commodities as well. The first part of the article is about repubs. blocking a bill that is supposed to fix some of this speculation issue. but if you read lower in the article it talks about the oil and what is driving it up. I would definitely say it is worth a read. Any thought's ?

Firedoglake » Republicans Vote Against Lower Oil and Gas Prices and for Illegal Immigration and More American Troop Deaths

[instarx]

There is no single reason for the increase in oil and gas prices. There are, however, some primary reasons. Most of the things you hear pundits say are politically motivated, so don't read an article and think "Oh, so that's the reason." Most of the writers write to support their political position.

I make a living investing so I try hard to keep politics out of my thinking. Here are the reasons I think oil has increased so much:

1. First and formeost, the USD has lost half its value over the past seven years. Since oil is priced in dollars it is obvious that the price of oil has doubled as a direct result. It's common sense - since a dollar buys half as much, you need twice as many dollars to buy the same amount of oil, so the price goes up x 2.
2. All the other reasons come in second to the devaluation of the dollar: speculation, uncertain oil supples (Nigeria, Venezuala, etc.), war in the middle east, increased demand from China and India, the shortage of refining capabilites, the shortage of drilling platforms, etc. No one knows the exact mix, but each contributes.

Gas was $1.50/gallon in 2001 and the 50% devaluation of the dollar since then has increased gas prices to $3.00/gallon ($1.50 X 2). The other $1.00 per gallon increase is caused by some unknown mix of the items listed in point #2.

[BetsyBio]

This thread has definitely changed my opinions on the high cost of gas. And your math sums the price cost very well.

Now if we could just do something about the dollar being crappy that would help thing a lot.

[tjts1]

Well by that theory the speculators are now driving down the price of oil. Currently at $122. I don't see anyone complaining.

[cfg83]

instarx -

Here are two more sources of grist for the mill :

1 - History and Analysis -Crude Oil Prices



2 - Dollar values and oil prices, Oil & Gas Journal - July, 2008

...
Between January 2002 and the first half of July 2008, the value of the US dollar fell from 1.132 euro to 0.634 euro, a lost of nearly 45% of its value. “Over the same period, dollar-denominated oil prices have risen from $18.42/bbl to $137.57/bbl for OPEC’s reference basket of crudes, an increase of almost 650%. The rise in the oil price over this period has far surpassed the fall in the value of the dollar,” said CGES analysts.
...
Then there is the matter of timing. Analysts said, “The biggest month-on-month jump in oil prices so far this year occurred in April, when the price of the OPEC basket leapt by 14%. In that same month the value of the US dollar rose against the euro, suggesting that there were other factors at play in driving the oil price upwards. Actually, since March of this year the dollar has been remarkably stable against the euro on a monthly-average basis, yet oil prices have risen by almost 40%.”
...

The 45% drop in the value of the dollar is within range of your statement. However, the 650% increase in the price of a barrel of oil is in conflict.

Question: By your math, I think a barrel of oil would only be in the range of $50 to $60 a barrel ($40 to account for the weaker dollar and another $10-$20 for world instability). Why has it recently peaked well over twice that?

CarloSW2

[instarx]

Originally Posted by cfg83

The 45% drop in the value of the dollar is within range of your statement. However, the 650% increase in the price of a barrel of oil is in conflict.

Ah, yes...the famous 650% number. I've seen that article before - it is often quoted to show that the dollar devaluation cannot be the real cause of the high price of oil. I don't blame you for being fooled - it is very, very good spin. As I said, almost all articles of this kind are politically motivated and that one is no exception.

Here is the problem: The writer incorrectly compares a linear scale (1.12 EUR/USD decreasing to 0.62 EUR/USD) to a logarithmic scale (percent price increase of oil). For example, if today the dollar were to drop 6 cents (10%) in value, oil would increase 10%, or a whopping $13 per barrel, but in 2002 that would have only been $2.20. Now the tricky part - because that $13 is 65% of the original $22/barrel price, the writer would say the price of oil has now increased to 715% (650% + 65%) over the original price! So the writer exponentially increases the "percent increase in oil" price while only decreasing the value of the dollar in a linear fashion. I'm not sure I explained that very well, but I hope you are having an "a-ha!" moment.

To anyone with a political motivation to decouple the devaluation of the dollar from the increase in the price of oil the really great thing about this way to calculate the relationship is that the higher the price of oil goes the less it looks like the devaluation of the dollar is the culprit! It's prime, grade-A spin, and many people have been fooled by this particular mathematical slight of hand.

Originally Posted by cfg83

Question: By your math, I think a barrel of oil would only be in the range of $50 to $60 a barrel ($40 to account for the weaker dollar and another $10-$20 for world instability). Why has it recently peaked well over twice that?

No real conflict, I think. It is wrong to make long-term trend assumptions from short-term data. For short periods of time things like wars, hurricanes, etc have huge price effects. Looking at $138/barrel oil for the past few months is like yelling "I'm getting 138 MPG on my aeromod! But of course you get to the bottom of the hill and it all evens out. Because of the banking crisis over the past year all markets have been very volitile, including oil. This is a very noisy period and we will have to wait to see how it all averages out.