60% Of Today's Oil Price Pure Speculation

[jtabeb]

An interesting read. Seems just like no one called the housing bubble before it bloomed, the energy/commodities bubble is playing the role of filling the coffers of investment banks during the housing deflation. And then the green bubble comes along... Oh my. Guess we can't have a green bubble if the energy/commodities complex deflates, there would be no reason to. SO our friends in power decide to stick us with an energy/commodities bubble to prime the pump for the green bubble.

Does this ever end. It's like Enron with the California Electric grid all over again, but this time on a world wide basis. Enron screwed up and went pop, but some folks apparently learned a very valuable lesson on how to exploit the system at everyone else's expense. God, don't you just love capitalism?

http://www.financialsense.com/editor...2008/0502.html

[friendly_jacek]

Re: 60% Of Today's Oil Price Pure Speculation

This is quite illustrative:

[Olduvai]

Re: 60% Of Today's Oil Price Pure Speculation

60% pure speculation.....
This would mean prices should be around 50-60 USD.
Considering the ever widening gap between supply and demand and the fact that oil BRUTO output is declining and it's NET energy worth is declinig even further this is sheer nonsense.
There is undoubtedly a speculation factor but much smaller than 60 %.

[Mega]

Re: 60% Of Today's Oil Price Pure Speculation

10-12% tops................anyone thinking other wise is in the "X-files".
Mike

[jtabeb]

Re: 60% Of Today's Oil Price Pure Speculation

10-12% tops................anyone thinking other wise is in the "X-files".
Mike

I would agree with ALL of you IF ENRON had not happened.

The Mass psychology is all wrong here. Everyone is a believer in Global warming and peak oil at this point, commodities boom too.

[FRED]

Re: 60% Of Today's Oil Price Pure Speculation

I would agree with ALL of you IF ENRON had not happened.

The Mass psychology is all wrong here. Everyone is a believer in Global warming and peak oil at this point, commodities boom too.

The "oil prices are being driven by speculation" story has been around since at least 2004.

Robert Samuelson nails the question here:

Is There An Oil 'Bubble'?

By Robert J. Samuelson (Washington Post)
Wednesday, July 26, 2006; Page A17

It's unclear how much this sort of speculation has increased prices, if at all. The report mentions estimates ranging from $7 to $30 a barrel. In theory, the process could feed on itself and create a huge bubble. The more speculators bought futures, the more oil would go into storage -- and the more spot prices would rise. At some point, the bubble would burst. Storage would be filled. Unexpected increases in supply or shortfalls in demand could put huge downward pressures on prices, because sellers would need to sell, and (again) demand is inelastic. Some experts, including Verleger, think this possible.

Whatever happens, we should avoid the easy conclusion that speculators have artificially increased oil prices. In truth, they are speculating against real risks -- the risk that oil from the Persian Gulf could be cut off; that hurricanes in the Gulf of Mexico could damage U.S. oil rigs and refineries; that political events elsewhere (in Russia, Nigeria, Venezuela) could curtail supplies. High prices reflect genuine uncertainties.

Oil is essential and insecure. A sensible country would minimize this insecurity by economizing on oil's use (through taxes and tougher fuel regulations) and developing its own resources. We should have redoubled our efforts years ago; we should do so now. more...

Is there more oil in storage, indicating a bubble? According to the DOE, stocks (inventories of fuel stored for future use) increased only 5.8% from 1,570,107 to 1,666,537 between Jan. 2004 and Apr. 2008.

Still no bubble.

[gugion]

Re: 60% Of Today's Oil Price Pure Speculation

http://www.senate.gov/~levin/newsroom/supporting/2006/PSI.gasandoilspec.062606.pdf

This is the report that the author was citing. It is quite an interesting read. Outdated though, but still of value I believe.

[GRG55]

Re: 60% Of Today's Oil Price Pure Speculation

The "oil prices are being driven by speculation" story has been around since at least 2004...


Is there more oil in storage, indicating a bubble? According to the DOE, stocks (inventories of fuel stored for future use) increased only 5.8% from 1,570,107 to 1,666,537 between Jan. 2004 and Apr. 2008.

Still no bubble.

Agree.

Every time ANY commodity is in a situation where the supply response in inadequate to a step-up in demand, stories appear blaming those nameless, faceless "speculators".

Listen to all the chatter about the grain markets recently...farmers who sold forward their 2008 crops in late 2007 want the govt. to step in and help them break those contracts because "it's not right that speculators should profit from the food crisis". That's the moderate position. The more hysterical want us to believe that grain speculators somehow magically created the world food shortage.

Two questions for the Enron theorists out there: If all these speculators learned from Enron, and they have so much power to control world markets, why did it take them so many years [post-Enron] to get around to using/abusing that power? And why is it that speculators in other commodity markets aren't as smart as crude oil and grain traders so they keep running the price of, say, uranium [instead of letting it collapse] or pork bellies?

The oil situation is due to a number of factors interacting with each other in a complex dance:

• Normally the oil futures curve is backwardated, and it costs money for consumers/speculators to buy and hold inventory.
• That means it's cheaper to have the producers manage inventory by "leaving it in the ground" until it's needed. After the oil price collapse in 1986, buyers forced a shift to a "just-in-time" inventory mindset, which made perfect sense for buyers/consumers of oil in a world awash in surplus producing and transport capacity from the 1970's resource investment boom.
• That worked fine [for consumers] for about 15 years.
• The first response of refiners/marketers in a situation of perceived tightness is to increase their physical precautionary inventories. The second response, once storage tanks are full or bids for current delivery go unfilled [which is exactly what happened to Japanese refiners bidding for Saudi oil last fall], is to start buying futures further out on the curve (longer maturities). It's this second response, if it becomes widespread, that can drive the curve from its normal backwardation to contango. That hasn't happened this time, which suggests to me that speculation isn't nearly as rampant as being suggested.
• Playing the spot price is small beans for crude oil traders. It's these very rare occurances, when the curve switches to contango [as happened in mid-2004], that those long oil make serious money. Refiners, who are perpetually "long" oil by the very nature of their business, saw some of the largest profits in decades during that period.
• The contango is normally a self-correcting situation, as producers have more incentive to forward sell at higher prices and defer production, which raises the spot price and returns the curve to backwardation. What is unusual [unprecedented?] this time is the contango persisted for several years.
• My sense is the current inventory build is partially seasonal and partially driven by potential supply disruption concerns [Nigeria-Iran-Iraq-Putin-Chavez-whatever...take your pick]. With the curve backwardated and spot oil well above $100, the producers are pumping furiously. Note the recent reports of Iran stockpiling high-sulphur crude in tankers. At the same time consumers/refiners have little immediate financial incentive to build and hold excessive inventories. Nobody can tell if the entire oil complex will collapse, but it seems quite certain at a minimum the spread between low quality crudes and light-sweet is going to widen materially this year. It would not surprise me if the dire predictions of gasoline prices going north of $4.00/gal in the USA do not materialize in 2008. It will probably take a serious disruption to world supply [an unpredictable event], or some really stupid energy policy move by Washington, to sustain that sort of run-up.

[metalman]

Re: 60% Of Today's Oil Price Pure Speculation

Agree.

Every time ANY commodity is in a situation where the supply response in inadequate to a step-up in demand, stories appear blaming those nameless, faceless "speculators".

Listen to all the chatter about the grain markets recently...farmers who sold forward their 2008 crops in late 2007 want the govt. to step in and help them break those contracts because "it's not right that speculators should profit from the food crisis". That's the moderate position. The more hysterical want us to believe that grain speculators somehow magically created the world food shortage.

Two questions for the Enron theorists out there: If all these speculators learned from Enron, and they have so much power to control world markets, why did it take them so many years [post-Enron] to get around to using/abusing that power? And why is it that speculators in other commodity markets aren't as smart as crude oil and grain traders so they keep running the price of, say, uranium [instead of letting it collapse] or pork bellies?

The oil situation is due to a number of factors interacting with each other in a complex dance:

• Normally the oil futures curve is backwardated, and it costs money for consumers/speculators to buy and hold inventory.
• That means it's cheaper to have the producers manage inventory by "leaving it in the ground" until it's needed. After the oil price collapse in 1986, buyers forced a shift to a "just-in-time" inventory mindset, which made perfect sense for buyers/consumers of oil in a world awash in surplus producing and transport capacity from the 1970's resource investment boom.
• That worked fine [for consumers] for about 15 years.
• The first response of refiners/marketers in a situation of perceived tightness is to increase their physical precautionary inventories. The second response, once storage tanks are full or bids for current delivery go unfilled [which is exactly what happened to Japanese refiners bidding for Saudi oil last fall], is to start buying futures further out on the curve (longer maturities). It's this second response, if it becomes widespread, that can drive the curve from its normal backwardation to contango. That hasn't happened this time, which suggests to me that speculation isn't nearly as rampant as being suggested.
• Playing the spot price is small beans for crude oil traders. It's these very rare occurances, when the curve switches to contango [as happened in mid-2004], that those long oil make serious money. Refiners, who are perpetually "long" oil by the very nature of their business, saw some of the largest profits in decades during that period.
• The contango is normally a self-correcting situation, as producers have more incentive to forward sell at higher prices and defer production, which raises the spot price and returns the curve to backwardation. What is unusual [unprecedented?] this time is the contango persisted for several years.
• My sense is the current inventory build is partially seasonal and partially driven by potential supply disruption concerns [Nigeria-Iran-Iraq-Putin-Chavez-whatever...take your pick]. With the curve backwardated and spot oil well above $100, the producers are pumping furiously. Note the recent reports of Iran stockpiling high-sulphur crude in tankers. At the same time consumers/refiners have little immediate financial incentive to build and hold excessive inventories. Nobody can tell if the entire oil complex will collapse, but it seems quite certain at a minimum the spread between low quality crudes and light-sweet is going to widen materially this year. It would not surprise me if the dire predictions of gasoline prices going north of $4.00/gal in the USA do not materialize in 2008. It will probably take a serious disruption to world supply [an unpredictable event], or some really stupid energy policy move by Washington, to sustain that sort of run-up.

excellent, thx! so... netted out... oil prices will remain high this year, even through usa and global recession?

[touchring]

Re: 60% Of Today's Oil Price Pure Speculation

I thought that oil prices will collapse because of recession, but it turns out that oil prices are price inelastic, and supply side squeeze by saudi arabia kept up high prices.

And should prices fall, Iran will come up with one of its antics to drive prices back.

excellent, thx! so... netted out... oil prices will remain high this year, even through usa and global recession?

[GRG55]

Re: 60% Of Today's Oil Price Pure Speculation

excellent, thx! so... netted out... oil prices will remain high this year, even through usa and global recession?

Not necessarily. As long as the threat of an unpredictable supply disruption remains then refinery and consuming inventories will remain elevated, and likely so will the price of at least the high-yield, high-quality grades of crude oil (including WTI).

If, for any reason, the [perception of a] threat of a disruption is removed these same excess inventories will be the cause of a potentially significant price correction. I appreciate that right now a scenario where the political problems in oil producing nations somehow get solved appears remote. But you can never tell which way sentiment and behaviour will move; the recent run-up in homebuilder stocks may be an example.

I am not making any predictions here; as I have said many times I have no idea where the price of oil will go in the short term - too many variables, too many uncertainties.

However, I will make this idle speculation: The USA has a large portion of the world's heavy oil refining capacity, and I am quite certain that the spread between heavy-sour and light-sweet oil will widen as the year progresses. I think this, combined with recession induced demand softening, could cap retail gasoline prices in the USA in 2008 at levels below the current dire predictions.

Edit added: California may be the notable exception, as it is very difficult for the heavy-oil supplied refineries in the USA to meet the unique California-only gasoline standards. "Let them burn ethanol..."

[GRG55]

Re: 60% Of Today's Oil Price Pure Speculation

I thought that oil prices will collapse because of recession, but it turns out that oil prices are price inelastic, and supply side squeeze by saudi arabia kept up high prices.

And should prices fall, Iran will come up with one of its antics to drive prices back.

Really?

Iran continues to produce its crude oil in excess of the demand from buyers and is now stockpiling it in rented tankers floating in the Gulf. What do you think that is going to do to the price?

With near-term prices well above $100 I seriously doubt there is a producable, marketable barrel of oil shut-in anywhere in the world. Oil behind bombed out Nigerian pipe isn't producable. Oil being stockpiled in tankers isn't marketable. But all the barrels that are just keep coming and coming at these prices. Producers, including Saudi Arabia, have never, ever demonstrated the ability to maintain discipline in these circumstances in the past. I see no reason whatsoever to believe any stories (from inside or outside OPEC) that they are doing so today. Iran's behaviour confirms it.

[touchring]

Re: 60% Of Today's Oil Price Pure Speculation

Really?

Iran continues to produce its crude oil in excess of the demand from buyers and is now stockpiling it in rented tankers floating in the Gulf. What do you think that is going to do to the price?

By antics i mean like declaring they are adding more centrifuges, stage another bump in to some UK fleet, etc.

[jtabeb]

Re: 60% Of Today's Oil Price Pure Speculation

The "oil prices are being driven by speculation" story has been around since at least 2004.



Still no bubble.

Me Thinkith, FRED doeth protest too much. What exactly is the no-risk premium spot price right now? The supply figures and inventories are showing the same situation as Megawatts on the electrical grid in california. See no added supply that's why prices are higher, no manipulation see, it's all increased demand with reduced supply, see.

What could not be seen in california was the shuttered capacity, it was only visible in the aftermath when the game was up. Your saying something similar is not/has not occured? It doesn't say ALL of the price rise, just up to 60% of the price rise, that is still expensive oil, just not outrageous.

C'mon you are telling me that development of non-transparent oil contract trading has NOTHING to do with the timing of the price spikes.

[friendly_jacek]

Re: 60% Of Today's Oil Price Pure Speculation

C'mon you are telling me that development of non-transparent oil contract trading has NOTHING to do with the timing of the price spikes.

I think this paper settles it:


International Review of Economics & Finance
Volume 9, Issue 1, February 2000, Pages 11-30

The price–volume relationship in the crude oil futures market Some results based on linear and nonlinear causality testing

Imad A. Moosa and Param Silvapullea

Department of Economics and Finance, La Trobe University, Bundoora, Victoria 3083, Australia

Abstract
This article presents some evidence for the presence of a causal relationship between price and volume in the crude oil futures market. The results of linear causality testing reveal the presence of causality running from volume to price but not vice versa. While the results of testing for nonlinear causality are inconsistent, most of the evidence shows that causality runs in both directions. In general, there is evidence for the sequential information arrival hypothesis and the noise trading model, but not for market efficiency. There is also some evidence for the presence of a maturity or a liquidity effect. Finally, there is some variation in the results, depending on the sample period.