Why is Oil falling?

[VIT]

Re: Why is Oil falling?

I guess we are witnessing history in the making because these synthetic derivatives have created the first negative bubble (making money through a self-reinforcing process of price decrease).

Should will call it anti-bubble, short bubble... double, rubble, ruble? :eek:


Let's say ... more than adequate ...

Very interesting.
*BTW the word "ruble" formed from the word "chop" (at least by one version).

[sunskyfan]

Re: Why is Oil falling?

I hate to be "mr simpleton" but has anybody ever considered that the correct interpritation is that nobody has any money. We watch breathlessly as the Fed et. al. create money out of thin air but we never stop to consider that in a Digital Fiat Currency economy that money can be destroyed just as easily.

[mcgurme]

Re: Why is Oil falling?

To the point that "no one knows where the bottom is:" just wait until we run into the same situation we had with gold delivery this Fall. Gold prices were unnaturally low, yet physical delivery at that price was very hard to obtain. The paper market was disconnected from physical reality.

To all those who think there is no bottom in oil - people are still using it. And prices are in contango, so a lot of the oil is being stored up. I've also noticed a lot more people driving again around here. Maybe oil usage was down a few months ago, but I'm pretty sure with gas below $2/gallon, usage is on the rise. Plus, the US is not the only country vying for physical oil. There are just a few other countries out there dependent on the stuff.

What happens when the paper price goes so low that physical delivery cannot happen at that price?

I'll leave that to the reader's imagination. But, ...it won't be like gold, where people just patiently wait a few weeks for delivery of their golden eagles.:eek:

Symbols can give you his answer. Here one answer. In my mind there is no question that oil is oversold, as is USO. The unanswered question is will it become even more oversold? I don't know. Buying things during drops is called "catching a falling knife." The problem with buying things in a downdraft is no one, I don't think, knows where the bottom is. As long as you are buying with prices dropping, I believe your are hoping to pick or catch the bottom. You might be lucky and catch the bottom, but I never do.

Look at a chart of USO http://stockcharts.com/h-sc/ui?s=USO...49&a=137304521

Though there have been two or three upmoves since July, none have gotten back to the 50 DMA. Wait for enough strength to occur to get the price up to the 50 DMA and assess then what seems to be going on with the ecomony, interest rates, dollar, etc.

If oil is going to resume a serious uptrend which I think it will at some point (when I don't know), then whatever is missed out on the move from the low to the 50 DMA or thereabouts will in the long term be insignificant. I guess one could use that argument and say buy now, and any further losses from here will be insignificant, but what if oil does ends up dropping into low 20's or high teens--that could be a 35% loss or more from today's close, which would then take a ~60% or more gain to get back to even.

[Supercilious]

Re: Why is Oil falling?

To all those who think there is no bottom in oil - people are still using it. And prices are in contango, so a lot of the oil is being stored up.

Sorry mcgurme, but things have changed. The Nymex quotes have nothing to do anymore with the real price for which the physical oil is bought and sold in the real economy. I believe GRG55 can give you better and more detail explanations about this. But crudes like WTi and Brent are just a fraction of the oil produced.

While the benchmark prices are still used for some transactions and pricing, when a refinery needs oil it doesn't go to shopping in Cushing loading barrels in the shopping cart like in toilet paper at Costco. A lot of oil is sold through long term contracts at prices that can be significantly different from the future markets quotes which these days are disconnected from the real demand and supply of physical oil. Those numbers can make very happy of very unhappy the producers of those particular types of oil (WTI Brent, Dubai light).

Prices on the Nymex and ICE exchanges reflect today the trends of the financial/virtual oil respectively the balance between synthetic short position derivatives and synthetic long position derivatives in the ETN-like financial universe. The contango you see is simply a price drag effect on the future transaction dates for virtual/financial oil.
When Goldman pushes prices down, this action propagates like a wave through future "delivery" dates and vice versa. This financial contango or backwardation is basically a measure of the pressure with which the price of virtual oil is pushed in one direction or another by "market makers", ... nothing else.

A good financial indication of the future evolution of Nymex prices may be the fact that the WTI dipped a lot compared to the Brent at month end, and since WTI is now is far more "indexed" than Brent, one may think that we are in a situation in which the synthetic shorts are more significant than the synthetic longs and the anchoring hedge is soon supposed to reverse in order to fry dumb investors, or simply the fact that Godman has found another profitable "innovation" and it's quietly exiting the commodities investing room.

If by the middle of next week we see the WTI/Brent price ratio reversing and WTI maintaing a good lead ... well ...

[GRG55]

Re: Why is Oil falling?

Sorry mcgurme, but things have changed. The Nymex quotes have nothing to do anymore with the real price for which the physical oil is bought and sold in the real economy. I believe GRG55 can give you better and more detail explanations about this. But crudes like WTi and Brent are just a fraction of the oil produced.

While the benchmark prices are still used for some transactions and pricing, when a refinery needs oil it doesn't go to shopping in Cushing loading barrels in the shopping cart like in toilet paper at Costco. A lot of oil is sold through long term contracts at prices that can be significantly different from the future markets quotes which these days are disconnected from the real demand and supply of physical oil. Those numbers can make very happy of very unhappy the producers of those particular types of oil (WTI Brent, Dubai light).

Prices on the Nymex and ICE exchanges reflect today the trends of the financial/virtual oil respectively the balance between synthetic short position derivatives and synthetic long position derivatives in the ETN-like financial universe. The contango you see is simply a price drag effect on the future transaction dates for virtual/financial oil.
When Goldman pushes prices down, this action propagates like a wave through future "delivery" dates and vice versa. This financial contango or backwardation is basically a measure of the pressure with which the price of virtual oil is pushed in one direction or another by "market makers", ... nothing else.

A good financial indication of the future evolution of Nymex prices may be the fact that the WTI dipped a lot compared to the Brent at month end, and since WTI is now is far more "indexed" than Brent, one may think that we are in a situation in which the synthetic shorts are more significant than the synthetic longs and the anchoring hedge is soon supposed to reverse in order to fry dumb investors, or simply the fact that Godman has found another profitable "innovation" and it's quietly exiting the commodities investing room.

If by the middle of next week we see the WTI/Brent price ratio reversing and WTI maintaing a good lead ... well ...

In some ways it sure does seem like a brave new world.

In my more than 30 years in this biz I've seen quite a few crude oil price spikes and collapses, some bigger than others. But like a lot of things these days, in the financial markets in particular, we seem to have a lot of never-before-seen-ever events and circumstances.

In the run up last summer I made several posts observing that, although there was a tight physical supply-demand balance, there was no real shortage, anywhere. I couldn't find anyplace where there was a fundamental inability to secure whatever petroleum products [gasoline, diesel, jet fuel, whatever] needed. There weren't any gas line ups, that sort of thing. The few media reports of shortages were all very localized, and mostly related to short term regional refining outages.

Nevertheless, the price spike was not something I haven't seen before when emotion takes over [sort of like a run on toilet paper at Costco when everyone is pursuaded there's never again going to be enough], and I was pretty sceptical that there any "abnormal" speculation going on [speculators are a long standing and necessary component of the commodities futures business].

I have no idea if "synthetic derivatives, ETNs, etc. are causing the apparently wild price fluctuations in the futures market. What I know is the physical market. And in the past whenever refinery margins are squeezed [and boy have they ever been squeezed this year] that situation has to be resolved with either a rise in wholesale product prices, or a fall in near month crude. As spot/near-month crude falls, traders with forward contracts in contango will, of course, close their positions, and that has, in the past, created an "avalanche" of "supply". In the most extreme cases that has driven the futures curve into backwardation.

$#* is absolutely correct saying that the price fluctuations bear little relationship to what is happening in the physical market.

[GRG55]

Re: Why is Oil falling?

Thank you Fred.


That is absolutely correct. I have to rephrase: we are witnessing the first financial bubble anchored in (drawing momentum from) a self-reinforced decrease in the price of an asset. I believe that these synthetic commodities derivatives have creates something completely surreal.

$#*: Is this derivatives scenario a zero-sum game for all the casino players collectively?

If so, it would seem that given the size of that casino and the speed and depth of the nominal price change since July, somebody has lost a lot of money. Now who is it that can actually afford such losses in this day and age? Someone with an essentially unlimited taxpayer-backed credit line? Or??

[Supercilious]

Re: Why is Oil falling?

$#*: Is this derivatives scenario a zero-sum game for all the casino players collectively?

Yes it is.

If so, it would seem that given the size of that casino and the speed and depth of the nominal price change since July, somebody has lost a lot of money. Now who is it that can actually afford such losses in this day and age? Someone with an essentially unlimited taxpayer-backed credit line? Or??

You are correct. In my rough estimation in the commodities derivatives casino some $1.5-1.6 trillion changed hands between the smart casino players and the dumb casino players. Nobody can absorb those losses in this day and age. But there are about $8.5 trillion in bailouts scheduled to be released. And it's like the CDS casino (which is also a zero sum game) when in the AIG bailout:
1) In the first stage for $85 bailout money the taxpayer got 80% of the AIG stock
2) In the second stage of the AIG bailout for $37.5 billion the taxpayer got ... WTF?

So ....you see now where is my problem with the derivatives casino. Why not to ask the smart gamblers who made all the money to return back the gains to the dumb gamblers. Why the average taxpayers, (who don't have their own hedgefunds and have never done any leveraged gambling) have now to pay for all this mess from their retirement savings and future income? And why the bailouts have to be more than the total losses?

I may be old school but investing (and even specualtion with oil) should not be done as gambling and at least not with someone else's money.
Hey if they want to gamble with synthetic derivatives, that's fine with me,... it's a free country...., but that should be taxed as gambling income not as capital gain, and the market makers should be taxed as casinos and regulated by a gambling commission.

[worthingtonse]

Re: Why is Oil falling?

I think that oil is falling because many would-be investors lost their fortunes in the Oil bubble and no longer wish to play oil. The investors who remain believe that there is a good chance that we will continue to have deflation and they will not risk losing their money by paying higher prices. So even if there is lots of demand and investors will make lots of money, few investors want the risk.

[kingcopper]

Re: Why is Oil falling?

Sorry mcgurme, but things have changed. The Nymex quotes have nothing to do anymore with the real price for which the physical oil is bought and sold in the real economy. I believe GRG55 can give you better and more detail explanations about this. But crudes like WTi and Brent are just a fraction of the oil produced.

While the benchmark prices are still used for some transactions and pricing, when a refinery needs oil it doesn't go to shopping in Cushing loading barrels in the shopping cart like in toilet paper at Costco. A lot of oil is sold through long term contracts at prices that can be significantly different from the future markets quotes which these days are disconnected from the real demand and supply of physical oil. Those numbers can make very happy of very unhappy the producers of those particular types of oil (WTI Brent, Dubai light).

Prices on the Nymex and ICE exchanges reflect today the trends of the financial/virtual oil respectively the balance between synthetic short position derivatives and synthetic long position derivatives in the ETN-like financial universe. The contango you see is simply a price drag effect on the future transaction dates for virtual/financial oil.
When Goldman pushes prices down, this action propagates like a wave through future "delivery" dates and vice versa. This financial contango or backwardation is basically a measure of the pressure with which the price of virtual oil is pushed in one direction or another by "market makers", ... nothing else.

A good financial indication of the future evolution of Nymex prices may be the fact that the WTI dipped a lot compared to the Brent at month end, and since WTI is now is far more "indexed" than Brent, one may think that we are in a situation in which the synthetic shorts are more significant than the synthetic longs and the anchoring hedge is soon supposed to reverse in order to fry dumb investors, or simply the fact that Godman has found another profitable "innovation" and it's quietly exiting the commodities investing room.

If by the middle of next week we see the WTI/Brent price ratio reversing and WTI maintaing a good lead ... well ...

Symbols, it's Monday the 22nd and WTI/Brent are close in price and moving in the same direction...So?

[raja]

Re: Why is Oil falling?

Thank you for your explanation, fascinating! So what are scrubs like us who continue to try to play shifts like this to do? I bought USO at 33 today, but a small position, so that I can ride out further downward momentum. But I fully acknowledge that I am playing in an arena about which I know very little. Are there any indicators we should look for that might indicate this particular bubble is set to unwind?

We are just at the beginning of the Great Great Depression.

When unemployment is 20% or higher, and 40% or more of businesses are closed, and retirement investments are wiped out forcing older folks to live with their children, do you think that the demand for oil -- or anything -- will go up? I don't.

With prices soooo low, it is very tempting to invest, but I have been resisting that temptation.

When will prices go up again?
When the Great Great Depression has ended. :eek:

[LargoWinch]

Re: Why is Oil falling?

We are just at the beginning of the Great Great Depression.

When unemployment is 20% or higher, and 40% or more of businesses are closed, and retirement investments are wiped out forcing older folks to live with their children, do you think that the demand for oil -- or anything -- will go up? I don't.

With prices soooo low, it is very tempting to invest, but I have been resisting that temptation.

When will prices go up again?
When the Great Great Depression has ended. :eek:

You can have the worse depression in history with fast increasing commodities prices. In other words: "the great great stagflation".

How much money will the CBs print? What else are they gonna do? What about that supply shock EJ is refering to? etc. etc.

Temptation or not, trying to time this will prove extremely difficult. Hence, accumulating positions regularly over time, based on a correct macro-trend, seems like a sensible strategy.

[Sharky]

Re: Why is Oil falling?

Why is Oil falling?

Does anyone else remember the MG fiasco from the early 90's? A large finance company had severe financial problems and starting selling huge numbers of long oil futures. The price of oil tumbled as a result.

With all of the financial turmoil, it wouldn't surprise me at all if we're seeing a repeat. The market is reflecting many of the comments in this thread: demand destruction, soft economy, etc. I don't buy it. Supply is being destroyed faster than demand. I think the decline is temporary, and when it bounces back, it's going to surprise everyone, just like they were surprised when the price fell.

[mcgurme]

Re: Why is Oil falling?

Hi Sharky,
You just said what I was trying to say upthread, which was torn down by symbols and GRG.

There is a looming disconnect between "paper" and "reality". If the price stays this low, shortages are likely to ensue due to supply destruction (without commensurate demand destruction). At the very least, shortages will lead to government interference in the paper markets. Under such a scenario, the price will not stay low for long.

Does anyone else remember the MG fiasco from the early 90's? A large finance company had severe financial problems and starting selling huge numbers of long oil futures. The price of oil tumbled as a result.

With all of the financial turmoil, it wouldn't surprise me at all if we're seeing a repeat. The market is reflecting many of the comments in this thread: demand destruction, soft economy, etc. I don't buy it. Supply is being destroyed faster than demand. I think the decline is temporary, and when it bounces back, it's going to surprise everyone, just like they were surprised when the price fell.

[GRG55]

Re: Why is Oil falling?

Hi Sharky,
You just said what I was trying to say upthread, which was torn down by symbols and GRG.

There is a looming disconnect between "paper" and "reality". If the price stays this low, shortages are likely to ensue due to supply destruction (without commensurate demand destruction). At the very least, shortages will lead to government interference in the paper markets. Under such a scenario, the price will not stay low for long.

Care to point out exactly where you think I "tore down" something you posted? I do not think we are in complete disagreement; but I do not think the timing of an oil price rebound can be determined, and under the present economic circumstances I am coming to the view that any durable recovery may be much further off than one would normally anticipate.

$#* has his own theories of why things are happening; of which I have been openly sceptical. However, I frankly do not know with any certainty why the futures market is reflecting the price structure it is. We've moved from a state of persistent backwardation for two decades to one of relatively persistent contango since mid-2004. Does today's steep contango represent a fear of future shortage? That is how we would might have interpreted it in the "old" days. Or is it instead reflective of some sort of organized, heavily levered, manipulation, a la $#*? Ordinarily I would scoff at the idea of anyone being able to manipulate a market as large and as deep as crude oil. But every day I get surprised by news from the financial sector that I never would previously have imagined. Does anyone really know? For sure?? At the end of the day I don't think it matters [and here is where $#* and I have our greatest divergence], for I remain convinced that in the end the fundamentals will prevail. Over the financiers and over "the-US$-determines-the-oil-price-100%" crowd.

As to supply destruction, that is indeed going on, but crude oil supply cannot be shut in instantly from offshore platforms in the North Slope or North Sea, or from mining and thermal operations in the oil sands. It is far, far more difficult to take that decision than people outside the industry often realize. In some instances altering the depletion plan can result in the permanent loss of recoverable reserves. In other instances the operations and manpower are so specialized that retaining the operating team is paramount, as these skills cannot be replaced without delays and considerable cost in the future [the training cost before one can send a worker out onto a North Sea platform is not trivial].

So to say, with absolute certainty, that supply is being destroyed faster than demand, in what may prove the fastest global economic contraction in 100 years, is not something I am willing to accept at face value. Here's why:

Preversely, it is the low cost producer - OPEC - that has the best ability to shut in [conventional] supply quickly. But conventional commodity economics 101 teaches that it is the low cost producer that survives the low price cycle, and therefore has the least incentive to cut back production; preferring instead to wait it out and force the curtailment [and potential bankrupcy] of their high cost competitors. Now doesn't that sound just like the game the Saudi's have been playing recently? That is why I do not accept that supply is coming off as fast as demand...not yet.

But you are correct. At some point [impossible to determine imo] the supply will eventually come off enough to create a perceived, or actual, deficit, because demand will not keep going down to zero. In the absence of a rapid recovery in global economic growth, I think that event will happen because of depletion aggravated by the systematic dismantling of the finding and development function under financial duress, not because of voluntary curtailment. And that is why I can easily see that event being a year or three in the future. In the meantime there will be plenty of price volatility and plenty of opportunity to scalp some folding money from the oil market for the nimble, quick and lucky.

[raja]

Re: Why is Oil falling?

You can have the worse depression in history with fast increasing commodities prices. In other words: "the great great stagflation".

How much money will the CBs print? What else are they gonna do? What about that supply shock EJ is refering to? etc. etc.

Temptation or not, trying to time this will prove extremely difficult. Hence, accumulating positions regularly over time, based on a correct macro-trend, seems like a sensible strategy.

Two opposing forces -- demand destruction and inflation. One takes the price down, the other takes the price up. I don't expect that prices will go up significantly for a long time.

As for supply shock, there will be over-corrections in response to decreased demand, but these will turn around and go the other way over time . . . so again, in the long run prices do not go up.

Many here know more about all this that I do, so take my comments with a grain of salt.