Why Oil Prices Will Tank

[ricco67]

The article states that prices will rise in China by 8%. Given the relative inelasticity of fuel, I don't know how much that will help.

It may not result in a great deal of conservation by those already using a lot of fuel, but it'll definitely supress demand growth going forward.

Well, I got the 8% part, but I don't know if it is the ENTIRE subsidy. For all I know its only 40% of what they are paying, but either way, it will make people take notice, though.

[Mr. Chenevert]

The price difference between what a barrel of crude costs vs what you can sell a barrel of refined product for.

Oil $100 bbl

Deisel $137 bbl

Gasoline $ 108 bbl

Crack spread is $37

(hypothetical example)

Thats what I thought, thanks. Now, why are we exporting to South America? The spread is even higher in South America?

The article states that prices will rise in China by 8%. Given the relative inelasticity of fuel, I don't know how much that will help.

A barrel of oil costs $5 less after the announcement. Thats a big help.

[TheNiche]

Thats what I thought, thanks. Now, why are we exporting to South America? The spread is even higher in South America?

The crack spread is what it is, regardless of who is buying the refined product. For commodities with reasonably deep markets, like gasoline and diesel, effectively all buyers are price takers.

[Mr. Chenevert]

The crack spread is what it is, regardless of who is buying the refined product. For commodities with reasonably deep markets, like gasoline and diesel, effectively all buyers are price takers.

OK, then I am still not sure why diesel that is refined in the US is exported to South America. If they cant make any more money (the spread is the same), there certainly is a higher transportation cost to get it to South America... and there certainly is demand here in the States, so why is it leaving in the first place?

[brerrabbit]

Realistically, it can't get to certain parts of the country. Logistically speaking there are no pipelines from where we are long to where we are short. So the best alternative is to export. This happens more than you would think. Being long on the west coast and short of the east coast does not mean we can move it there. Also in some cases off spec products that cannot be sold here will either have to be shipped back to the refinery for reprocessing or in some instances sold to the export market.

[TheNiche]

OK, then I am still not sure why diesel that is refined in the US is exported to South America. If they cant make any more money (the spread is the same), there certainly is a higher transportation cost to get it to South America... and there certainly is demand here in the States, so why is it leaving in the first place?

South America has growing economies that need fuel, and it may just be that they aren't able to refine enough to satiate their demand at a price that is equal to or lower than the cost of imported fuel. They aren't dummies, and will acquire fuel from the lowest bidder, just like we do with crude.

[houstonmacbro]

But I keep hearing that there is plenty of oil.

Somebody's lying.

[TJones]

Here's the deal. You have to put a leash on the speculators like I have said before. We HAVE to start drilling in other places to decrease our dependence on foreign oil. Let's start HERE !!!

[houstonmacbro]

So what's the REAL deal .. I hear that most oil companies aren't even drilling on the leases they already have.

[TJones]

Not to worry Macbro, there are 5 major companies that are to begin new ventures in the great white north under the icepacks. As long as those pesky Polar Bears don't eat all the oilcatters, price of oil should be coming down within the next few months.

[lockmat]

Not to worry Macbro, there are 5 major companies that are to begin new ventures in the great white north under the icepacks. As long as those pesky Polar Bears don't eat all the oilcatters, price of oil should be coming down within the next few months.

Where does one obtain this kind of information?

[TJones]

Where does one obtain this kind of information?

I am speculating myself, on the price of oil coming down because of new drilling. But as far as finding info, simply type in the proper search. http://www.knoxnews.com/news/2008/jun/15/o...o-bother-polar/ . What I like about THIS writer's story is that they failed to mention that the ink on these contracts dried a few months ago, way BEFORE the whole Poalr Bear B.S. love-in came about.

[lockmat]

Couldn't find another suitable thread for this topic. The subsequent paragraphs aren't related.

http://archive.patriotpost.us/pub/08-26_Digest/page-4.php

Reverse globalization takes hold

They say every cloud has a silver lining, and perhaps that is even true of the hubbub over fuel costs. Each day, as we are bombarded with news stories of skyrocketing gas prices and political battles over the potential solutions, an interesting and profitable side effect is that manufacturing and jobs are coming back to the U.S.

This phenomenon, dubbed

[TJones]

China is supposedly drilling about 80 miles off the coast of Florida. I have also heard as close as 60 miles.

[lockmat]

China is supposedly drilling about 80 miles off the coast of Florida. I have also heard as close as 60 miles.

Right, that's what I was referring to. I'm looking for cold hard facts though since I've heard it's true and false.

[TJones]

Right, that's what I was referring to. I'm looking for cold hard facts though since I've heard it's true and false.

Do a yahoo or google search. You will find what you are looking for. Type in something like "China drilling off U.S. coast".

[RedScare]

If it were true, there'd be helicopters flying all around it filming it. Clearly, it is not true. What apparently IS true were Cuba's efforts to convince China to drill.

[TheNiche]

So what's the REAL deal .. I hear that most oil companies aren't even drilling on the leases they already have.

That is correct, and there are a couple of very good reasons for this practice.

A lot of landmen (the occupation within Exploration & Production that deals with the acquisition of rights to land and minerals) pay a premium to lock in a long-term lease on a drill site. This gives the oil producer the flexibility to make strategic decisions with respect to when will be the most profitable time to drill. If a well's peak production will be during the initial three years, for instance, and you anticipate that the price of oil on a three-year futures contract is going to be significantly higher in two years, then you'll want to hold the lease and not drill until you can lock in the highest rate for the product. If offshore leases issued by the government required immediate drilling, then many of those leases could not be sold at such a high price and still lead to profitable production...which effectively means that the government is forgoing income in order to incite a more rapid development of crude than what is anticipated as a future need in the marketplace for the physical commodity.

But another factor that plays heavily into the calculus is just the price and availability of drill ships and offshore platforms. There aren't enough. Capacity utilization for oil & gas equipment is already tremendously hgh. It would be physically impossible at the moment to drill every available lease.

[cottonmather0]

Here's the deal. You have to put a leash on the speculators like I have said before.

TJones, I'll pick on you now since you're the latest to bring up this nonsense. Please explain how speculation in oil is a bad thing and how it affects the price you pay for gasoline today.

In other words, what are "speculators" doing today that is driving up the cost of oil? Please be as specific as you can, especially with regards to how an oil futures contract is settled at expiry relative to the spot price of crude oil.

I am not trying to be a _____ (uncivil word) by asking this. I work in the energy futures markets and I know how the system works (or how it's supposed to, at least) and I am curious what effect you think eliminating a whole class of traders from the market would cause that would lead to lower prices, or at least how it's their fault to cause the price to rise.

[TJones]

Never said ONE word about "eliminating" ANYONE. I said put a LEASH on them. It seems that the speculators are trying to make everyone think that there is some sort of shortage. Explain to me how it is that when the Saudis and others say they will ramp up production, and that new drilling is just around the corner to eliviate "speculated" shortfalls, that the price "controlled by you, the speculators" on the open market, doesn't go down one iota? Who controls the prices on the stock exchange, SPECULATORS ?! We are talking "wash-sales", because there is no regulatory committee to oversee them. In other words, NO OVERSIGHT while they are possibly making false reports to drive up the price!!! Because you guys make money as long as there is fear that we are gonna run out of oil, the commodity skyrockets because the speculators want to keep making that kind of money for as long as they can. If they don't have such an impact on the pricing, then why are they being hauled in before judiciary and senatorial committees ?

Now, go pick your nose !

[TheNiche]

Never said ONE word about "eliminating" ANYONE. I said put a LEASH on them. It seems that the speculators are trying to make everyone think that there is some sort of shortage. Explain to me how it is that when the Saudis and others say they will ramp up production, and that new drilling is just around the corner to eliviate "speculated" shortfalls, that the price "controlled by you, the speculators" on the open market, doesn't go down one iota? Who controls the prices on the stock exchange, SPECULATORS ?! We are talking "wash-sales", because there is no regulatory committee to oversee them. In other words, NO OVERSIGHT while they are possibly making false reports to drive up the price!!! Because you guys make money as long as there is fear that we are gonna run out of oil, the commodity skyrockets because the speculators want to keep making that kind of money for as long as they can. If they don't have such an impact on the pricing, then why are they being hauled in before judiciary and senatorial committees ?

Now, go pick your nose !

Speculators can go long or short. If you're short, there's just as much incentive to dishonestly manipulate the price to decline.

[TJones]

Speculators can go long or short. If you're short, there's just as much incentive to dishonestly manipulate the price to decline.

Not in TODAY's market. Show me where the profitablity is with going short on oil ? Again, that brings up the point for a need of an oversight committee.

[cottonmather0]

Speculators can go long or short. If you're short, there's just as much incentive to dishonestly manipulate the price to decline.

Beat me to it.

Never said ONE word about "eliminating" ANYONE. I said put a LEASH on them. It seems that the speculators are trying to make everyone think that there is some sort of shortage. Explain to me how it is that when the Saudis and others say they will ramp up production, and that new drilling is just around the corner to eliviate "speculated" shortfalls, that the price "controlled by you, the speculators" on the open market, doesn't go down one iota? Who controls the prices on the stock exchange, SPECULATORS ?! We are talking "wash-sales", because there is no regulatory committee to oversee them. In other words, NO OVERSIGHT while they are possibly making false reports to drive up the price!!! Because you guys make money as long as there is fear that we are gonna run out of oil, the commodity skyrockets because the speculators want to keep making that kind of money for as long as they can. If they don't have such an impact on the pricing, then why are they being hauled in before judiciary and senatorial committees ?

Now, go pick your nose !

OK, "put a leash" on them. Big whoop, that's not my point.

But you either dodged my question or you didn't understand what I was asking, so I'll repeat the most basic question I have for you:

How is the settlement price of a futures contract determined at expiry?

If you can't answer that question, then you can't justify your assertion that "speculators" are driving up the price.

With regards to the Saudis specifically, they pledged to raise production by 200,000 bbd in a market that is consuming more than 80,000,000 bbd. That's less than 1% and many of the analysts who follow the oil market don't think they even have the capacity to increase their production by that much. Ergo, that's not much of an increase in supply to help meet demand that's rising even faster, so the price isn't even going to flatten out, much less go down.

With regards to congress, they're a little bit ignorant and a whole lot cynical and they have every incentive to look for someone else to blame rather than risk getting blamed themselves by their ignorant constituents when they tell them to adapt their lifestyles to a new paradigm. That's a pretty rich comment to say that congressional inquiries is prima facie evidence of wrongdoing.

BUT, with regards to oversight, there are indeed some games that a lot of traders play with their books and with market procedures that set index prices and settlements, but 99.9% of that is in forward markets and has nothing to do with the purchase price that Exxon pays for a barrel of oil to be refined into gasoline and the ultimate price that you pay at the pump. I could get more specific, but then I would start to give away the answer to the question I want you to answer in your defense of the anti-speculator meme.

I am thinking by your response that you really don't understand how a commodity market works.

[TheNiche]

Not in TODAY's market. Show me where the profitablity is with going short on oil ? Again, that brings up the point for a need of an oversight committee.

There is plenty of talk about shorting oil. Below are various articles, arranged roughly in chronological order. If you're somebody that trusts T. Boone Pickens, then there was a time that he was giving advice by way of which you could've gone short on oil and presumably made money (if he was right).

And a lot of it is about timing. Going short on oil doesn't mean that you're necessarily locked in for months or years at a time. It is a highly volatile market, and volatility may as well mean the same thing as opportunity for a trader.

Btw, I'm not a commodities trader, but I was taught the game by the general counsel of Enron's former trading operation.

http://www.secinfo.com/d18TY3.v3Cu.htm

http://www.cnbc.com/id/21653373/

http://www.thestreet.com/newsanalysis/ener...y/10389811.html

http://www.marketwatch.com/news/story/play...51DF370CFFB8%7D

http://www.247wallst.com/2008/02/t-boone-pickens.html

http://www.cnbc.com/id/23272368

http://latimesblogs.latimes.com/money_co/2...tock-marke.html

http://www.thestreet.com/newsanalysis/stoc...r/10419377.html

http://blogs.wsj.com/marketbeat/2008/06/06...e-to-short-oil/

http://www.telegraph.co.uk/money/main.jhtm...cndenham124.xml

[TJones]

I am not a trader nor claim to be. I do feel that I have a good grasp on how commodities work on an open market. The settlement has to be acheived between both parties involved. But if a Speculator is selling the seller of oil a bill of goods, behind the scenes, that they will make their product worth a certain amount and hold it there, then they are MANIPULATING the market in which the commodity is being brokered. The speculator sells on what he/she believes the possibilities of the amount of commodity there will be. Since there is no oversight for these speculators, who's to know what they are capable of ?

Speculators set the price, do they not ?

[TheNiche]

I am not a trader nor claim to be. I do feel that I have a good grasp on how commodities work on an open market. The settlement has to be acheived between both parties involved. But if a Speculator is selling the seller of oil a bill of goods, behind the scenes, that they will make their product worth a certain amount and hold it there, then they are MANIPULATING the market in which the commodity is being brokered. The speculator sells on what he/she believes the possibilities of the amount of commodity there will be. Since there is no oversight for these speculators, who's to know what they are capable of ?

Speculators set the price, do they not ?

TJ, speculation is an activity, not a person. Traders are one kind of speculator, and so is the guy that fills his car up with gasoline on the day that crude (a feedstock to make gasoline) spiked in price. So is the gas station that raises its price shortly thereafter to reflect that their (and their competitors') next shipment of gasoline will be more costly. So is Nabors when they make a billion-dollar commitment to develop an oil platform in the Gulf that'll only produce crude on a time horizon beyond which the price of oil is understood...and so is the guy that brokers a partial financial hedge on crude prices to at least shore up part of the risk.

Get rid of private speculation and you have out-and-out communism, where government sets the rules to ration finite supplies. It's a harsh word and you might think it used rhetorically...but it is not. Remove speculation and you have communism. Period.

[TJones]

TJ, speculation is an activity, not a person. Traders are one kind of speculator, and so is the guy that fills his car up with gasoline on the day that crude (a feedstock to make gasoline) spiked in price.

We are talking about the actual PEOPLE (persons) speculators, in the pit, day after day trading the commodity. Not the ACTION in which they are performing. The people at the pumps (us) are the victims, both of their own gluttony for gas, and by what speculation, which is the "activity" that is being performed by spectators (people), who are pushing prices up by having no regulations on how they do business, and if they had regulations enforced, you wouldn't have oil spiralling out of control. But, with no regulations, or rules, you have CHAOS, whcih is what is happening now. I am making a profit on some oil and natural gas stocks I have, but I in return have to put those profits in my TANK ! Because although oil has doubled, gas has TRIPLED ! It is not proportionent to it's overall value.

By speculators (people) speculating (activity) trumped up numbers so that they and the people they contract with, make gobs of money, and having the knowledge that there is no shortage of oil on this planet, just cheeses me off. Perhaps because I am not making the kind of money they are, especially when I have been around it my whole life.

Cotton, you and Niche have both said that they can go long or short, proving that they manipulate the market. They lie about amounts available either way. They tried this once before in the 80's and got busted by OPEC letting the oil flow. I have already said that I believe this is all happening as a way to push ANWR through. Someone is in someone else's pocket on this whole thing.

[N Judah]

I was thinking about this the other day and I think it is like an overheated housing market. Let's say that a bunch of people in California (or wherever) restrict supply so thoroughly that anyone who wants to get in has their options severely restricted. The existing houses for sale get bid up insanely high by a few desperate people, making the other sellers even more confident that they can get more money for their house by just waiting.

But instead of a bunch of people sitting on prime real estate, we have a bunch of people sitting on oil leases while the available oil gets bid up and up (exacerbated by what seems to be a mass hysteria). And instead of saying oh well, California isn't for me, I'll just move to Vegas, we have to sit here (taking it up the whatever) and wait for Silicon Valley entrepreneurs to develop new energy tech for use 10-15 years down the road. Then when that happens everyone will suddenly realize that what they're sitting on is worth less and less as time goes by and, in the process of ditching, will incite mass hysteria in the other direction.

I don't know that much about oil speculation but if it is anything like currency speculation there is definintely a psychological component. Any bad news, anywhere, and suddenly the whole thing snowballs into higher prices. I don't trust speculators' instincts any more than I trust that of the general public.

[TheNiche]

Sober up and try explaining that again in the morning.

[N Judah]

Sober up and try explaining that again in the morning.

Civility, please!

In all seriousnes, the Telegraph article is the best of the ones you've listed. An "essential widget with complete patent protection" describes oil in this country pretty well.