March 16, 2011 at 7:26 pm #2344
Market Speculators and the Real Cost of Oil
Rep. Joe Courtney – U.S. Representative, Connecticut’s 2nd Congressional District
The Huffington Post March 16, 2011 09:51 AM
Last week, the New York Times concluded a story about the day on Wall Street with an interesting — and telling — dichotomy about the cause of skyrocketing gas prices:
[blockquote][The market for oil] remained volatile as The Associated Press reported that Saudi forces had opened fire on protesters. In addition, violence escalated in Libya, where rebel fighters fled Ras Lanuf, the strategic refinery town, under ferocious rocket attacks and airstrikes by forces loyal to the Libyan leader, Col. Muammar el-Qaddafi.
Though the Energy Information Administration reported this week that crude inventories in the United States rose 2.52 million barrels, traders seemed concerned about possible disruptions in supply.[/blockquote]
Even as American oil supplies remained secure and ample — even as domestic oil production is at its highest level since 2003 — the price of crude in the commodities market is spiking ever upward. The price of gasoline has gone up more than 40 cents over the past three weeks nationally, and it continues to trend higher. Tom Kloza, head of the Oil Price Information Service, said that not only could gas prices continue to rise, but if unrest continues in the Middle East, the cost per gallon could spike to $5 or more.
While that fear is real, it relies on false causation. The two leading exporters of oil to the United States aren’t even in the Middle East; they are Canada and Mexico. Plus, today’s drilling technology is making oil shale in North Dakota, California, and Texas financially viable. Market analysts predict that oil from these sources will reach 30 percent of current U.S. production by 2015. So with secure, full reserves, increasing domestic production and reliable continental suppliers, why are prices astronomical and volatile?
Recently, a rumor that Libya’s long-time ruler Muammar Gaddafi had been shot tore across the commodities market, sending U.S. crude oil futures down more than two percent. Other rumors have had similar immediate and sweeping effects, even without real changes in actual oil production or reserves. The cause is oil speculators, such as hedge funds, who buy and sell commodities, profiting by betting on short-term price changes.
These traders are making money on quick movement, wagering on rumors and market blips. They are buying and quickly re-selling commodities they have no intention of actually holding or using. Their opportunism is once again hitting working-class families across the country, increasing the burden on small business owners and farmers, and elevating the cost of summer travel. In fact, according to analysts at Societe Generale, if the price of oil today reflected just current supply and demand, it would cost approximately $20 less per barrel. According to NPR, that extra $20 is what traders call the “geopolitical risk premium.”
The framework to address the problem is in place, and it begins with diluting the influence of speculators. Companies that actually take possession of oil and gas have argued passionately for years that stabilizing gas prices requires limiting the impact of speculation. Now, because of tools established by the Wall Street Reform and Consumer Protection Act, which the President signed into law last year, we are poised to curb speculators’ influence and return to reason at the pump. Right now, speculators outnumber traders who buy and sell for their own consumption, four to one in the previously-unregulated derivatives market. Meanwhile, high-frequency trading — the type used for short-term profit — accounts for one third of all trades in the futures market.
The Wall Street Reform Act includes tools to protect consumers from market swings, and allows the Commodity Futures Trading Commission (CFTC) to limit the influence of speculators. It allows strict limits on the number of speculators and dilutes their influence on the market. It is a common-sense, but very important, step toward reigning in gas prices before the summer travel season.
Not surprisingly, as the CFTC is moving forward to implement consumer-friendly changes, the CFTC itself is under attack by House Republicans determined to slow implementation of the Wall Street Reform Act. Their spending proposal — which gutted funding for veterans, alternative energy research and students — would slash CFTC’s budget by one third and reduce its staff from 680 to below 440.
Those cuts would impact CFTC just when their oversight is needed most — when it could do actual and immediate good for the American people.
Republicans in the House today are again shouting “Drill, Baby, Drill.” But the fact remains: rising gas and oil prices are not a result of too little supply. They are a result of trepidation over the future of the Middle East — a trepidation that is fanned by speculators who profit as middle-class Americans pay more at the pump.
March 16, 2011 at 7:26 pm #5199
Here is very good article that shows at least one politician gets the true cause of high oil & gas prices – Wall Street Speculators. Although I don’t agree with lot of his other positions – he has firm grasp on this one and if US doesn’t follow thru and use the Reform tools now in place……then we deserve the problems Speculating has caused.
Using the current $100+ oil & +$4-5/gal gas spikes as backdrop against fundamentals that show prices should be $20/bbl lower and that there isn’t any facts or fundamentals driving these prices! It’s just pure hedge fund greed speculating at expense of average Americans expense (as if they aren’t bloated enough off destruction of IRA/401K’s from financial speculating).
If you work for oil company then they are also partly to blame – their trading groups could kill this type speculating quickly because they have control of physical barrels in market & the actual buying. But like most oil & crude traders they think they can game the system and are just going along with the hedge fund speculators. A situation like Japan’s Crisis or US reversal of recovery due high oil prices might take all of them (along with all of us) down the tubes as it has always done in the past.
The hedge fund speculators & short-term / high-frequency traders out number real physical oil traders by 4 to 1, and until we force them on the sidelines they will destroy one business sector after another in the US…..its all connected.
Any Republican or Democrat stopping immediate implementation of reform & protection against these speculators needs to be thrown out 2012 along with all the others already on disposal list Americans are quickly forming. I suggest both Republican Weeper of House & Wisconsin Governor join list of remaining Liberal Democrats for ousting.
March 31, 2011 at 2:24 pm #5181
WTI Will Be $90 in a Month as There’s No More Storage at Cushing
By Dian L. Chu, EconMatters Posted: March 31, 2011
The latest inventory report came out on Wednesday, March 30 from the U.S. EIA (Energy Information Administration) showing Cushing stocks at a record 41.9 million barrels (Fig. 1). And guess what? The news is only going to get worse for WTI longs, as the next couple of weeks will bring the total storage at Cushing close to the max capacity of 44 million barrels due to the fact that more traders took delivery on WTI on the last CL rollover.
MENA Does Not Matter Much
There is a three week span after the expiration where actual physical delivery takes place, so expect the next two EIA reports to test whatever remaining spare capacity exists at Cushing. In other words, it doesn`t really matter what is occurring in the MENA (Middle East and North Africa), since over the next month at the next rollover, traders will have to sell any long positions because they cannot take delivery even if they wanted to.
Abnormal Crude Deliveries
Furthermore, because of the events transpiring in the MENA over the last couple of months, traders who normally don`t take delivery have taken delivery over the last two rollovers, due to ‘what if” scenarios where Saudi Arabia became a legitimate concern, and oil spiked to $130 a barrel. The fallout from this is that traders and investors who normally take delivery will not be able to during this next rollover, as there will literally be no more storage at Cushing.
New Sellers Abound
This is very bearish for WTI prices over the next month, as now you are going to have an entirely new segment of sellers come rollover time. As such, expect the U.S. WTI (West Texas Intermediate) prices to overshoot to the $90 a barrel range as shorts pile in before recovering a little around $93 a barrel at rollover (give or take a couple of bucks in either direction).
It is just not Cushing, the total U.S. supplies rose for the 10th time in 11 weeks, up another 2.9 million barrels for the March 25 week to 355.7 million (Fig.2). Remember during the summer when oil prices were in the low $70s? Well, inventories were at the height around 368 million barrels, which became a big headwind for long only speculators in crude oil at the time.
Demand Destruction by High Oil Prices?
So, here we are–only 12 million barrels from that exceedingly bearish level of US storage. And with these high prices we are starting to experience legitimate demand destruction. It seems with these high prices it is only a matter of time before we are again at the 368 million barrels of oil in US storage facilities at the Commercial level. So the Oil Bulls can no longer point to Cushing as an anomaly, we are literally swimming in Crude Oil right now in the US.
What’s Up with Rising Imports?
The news gets even more bearish for the Brent crowd as the following question should be asked regarding rising imports which are at their highest level in two months, at 9.1 million barrels per day–If there is such a tight supply in crude oil internationally, i.e., reflected in a much higher Brent premium to WTI, then why are imports rising when the US already has sufficient supply right now?
The reason is that there is no other place for this oil to go, especially with Japan`s massive cutback due to a natural disaster which has severely hampered much of its manufacturing, supply chain infrastructure, and domestic demand. All of this portends for continued higher import numbers for the next couple of months until Japan starts ramping back up to normal Oil demand statistics.
Logic Says …
Unfortunately, Brent doesn`t actually have easily discernible inventory numbers, but through logical deduction one can surmise that if supply were really as tight as the price suggests, then imports to the US market would actually be significantly down, and not up. So expect Brent to come in as well over the next month. (Maybe in the range of $105 to $107 a barrel).
High Prices Kill Demand
With regard to the product side, gasoline inventories fell 2.7 million barrels to 217.0 million (Fig. 2) for the sixth straight weekly draw as there was a period at the beginning of the year where we had a succession of inventory builds in gasoline products. The draw reflects decreasing refinery output, at 8.7 million barrels per day for the lowest rate in almost three months.
Refineries are cutting output as gasoline demand weakens in direct correlation over the last month due to higher prices at the pump, down 0.1% for the first negative year on year reading since the beginning of February.
This is a prime example of economics with regards to higher prices affecting consumers driving behavior, enough to lower demand for the product in the market, and change consumer spending behavior with some credit card companies becoming the unintended beneficiaries of high gasoline prices. According to credit-land.com, as a way for consumers to offset the higher fuel costs, the industry has seen a rising number of applications for gas reward credit card.
Since there is a slight lag between the RBOB futures price and the price paid at the pump, expect demand to go down even further as gasoline prices fully manifest the appreciation in the futures market.
Down Goes The Pump Price
There is some good news for consumers in all of this as oil prices correct down over the next month; prices at the pump will start to go down as well. It is really the only way to get the consumer demand numbers back up and positive year on year which is necessary to work off these large inventory numbers in crude oil storage.
Correct Now or Collapse Later
The consumer and the US economy needs lower prices to grow at a significantly higher rate in order to make a dent in an overall saturated oil market. The longer prices stay artificially high, and not reflect true demand in the market, well given the current oversupply situation, the correction when it does occur will be even sharper (For example the 2008 Oil collapse).
The old adage “you can pay now, or pay later” applies to the crude oil market here. You can ignore fundamentals for only so long, in the short term, supplies don`t really matter to traders, but there comes a time when fundamentals in the market supersede political and technical based analysis.
In the end, fundamentals have the ultimate and final say regarding price direction in the market. And over the next month, fundamentals will dictate that Crude Oil prices correct to a lower level from current levels.
This correction would actually be healthy for the oil market, if this fails to materialize, and oil prices stay high with continuing oversupply, and weak demand, i.e., an artificial mismatch between supply, demand, and price, expect an even “healthier” and fundamentally more severe correction when market equilibrium reasserts itself.
Supply & Storage Fundamental Matters
Now that I have your attention, no one can predict where oil prices will actually go as the crude oil market is a complex equation with ever changing variables. However, the purpose of the article is to discuss the developing supply and storage capacity dynamics in the market place.
Some other factors which might help facilitate crude oil`s decline would be the stepping down of Libyan leader Muammar Qaddafi, an early ending to QE2, a strengthening US Dollar, and some profit taking in some of the commodity related funds that include Gold, Silver, and Oil.
As recent fund inflows have helped prop up WTI beyond purely concerns over the unrest in the MENA region, the exact oil price will depend upon some of these other factors. Nevertheless, it seems reasonable to assume that one factor is quantifiable, and that is the supply issues with regard to storage capacity in the US market. Given these dynamics, WTI should close lower than when it started as the front month contract, and that hasn`t happened in a while, with prices being somewhere in the $90s.
March 31, 2011 at 2:30 pm #5180
Here is good update of fundamentals starting to overtake the Speculated price drivers that have nothing to do with demand or market based forces. The fear premium from Japan’s crisis went the wrong direction – as worlds 3rd largest consumer of Crude oil it should have gone down $20/Bbl not up because a lot of crude was released into the market. Libya was pure speculation as only 2% supplier it is merely a rounding error & trying juxtapose its position to Saudi Arabia is ridiculous.
Lets hope that the already developing loss on short positions for crude catch a lot of the 4 to 1 Wallstreet trading speculators & bankrupt their companies ……. unfortunately lot these folks are mutual fund investors managing your 401K/IRA.
The price drop/correction should yield good margins for Refiners & some analysts are already predicting good quarter for Valero & ect – be good see some stampede towards upstream investments get reality check. But I expect the petcoke fuel market is running a close second to Crude as overpriced & over-speculated due to lot issues on how accurately market price indexes reflect market as opposed to fudged values. And perhaps the tsunami of new high sulfur petcoke capacity that has been installed in 2007-2011 will actually see the market ~ US/NA production levels havent broken 2004 39MM mtpy level even though +5-6MM mtpy capacity has been installled but due economics/low utilization/ect has never seen market.
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