Gas Could Fall To $2 Per Gallon If Congress Acts On Speculators: Analysts

Originally posted by StellarX
I don't know and i'm still not sure why you think they will have to take physical delivery of the resource? Do you understand that contracts can be traded as easily as the commodity itself?

When the contract expires on the last day of the contract, there is no speculation! Speculators have to quit trading on the last day of the contract else they would take delivery of the oil. It doesn't matter what the speculators do in the middle of the contract. All contracts for future oil eventually hit the expiration date. When the contract date is fulfilled it's put up or shut up time.

In order for speculators to sell the back end of the contract and buy up front for a new contract they have to find an actual buyer who wants the oil. If oil wasn't worth $130 a barrel then the buyers wouldn't purchase the contracts for that amount and you, as a speculator would lose your shirt. You'd be selling at a reduced price just to cut your losses. Even if you thought the oil was worth $130 you'd have to be able to use the oil or have a place to store it all.


The short sellers and those that are long on oil are simply betting against each other and none of it matters until the final day of sale.

Originally posted by dbates
No, just because you hear that more speculators are buying oil, doesn't make you want to go out and drive cross country trips. The news that more people are buying oil won't cause truck drivers to drive 100 miles out of their way to use more diesel.

No it wont as these people will just do less and less of the type of driving that can be avoided.

Demand is only coupled to price. Increasing prices will lower demand.

And that's where you are completely wrong. Demand is also coupled to necessity and increasing prices can only force so many people to join drive pools or walk to work. Since it can most certainly not force those who can barely afford food at current prices to eat any less than they already are the supply and demand maxim can go all to hell in my books.

That's what doesn't make sense about this whole bit of racket. If prices are rising simply because of speculation, they why isn't demand falling due to rising prices?

Demand is not falling because industry is also very dependent on transportation; what mostly happens in a growing world economy is that expansion slows but the demand for oil can not truly fall any more as there is too much invested to do anything but pass on the added cost to the consumer. As always there are forces that may in fact be stockpiling but considering the trading of derivatives ( you really need to check that out if you think futures is not important enough a tool) there is very little that can't be done to markets with sufficient capitol.

This is simple ecomomics. Just because you change the name of the commodity doesn't mean the rules are any different.

Nothing about economics are simply in a market that is not free and if they were economist would be the first to know ( and they don't know) and markets would become understandable and stock and commodity prices would not be nearly as unpredictable.

Would hearing that market speculators were buying contracts of wheat make you run out and eat more bread than normal? No, if anything it would make you look for cheaper alternatives for dinner.

No but if the self same speculators knew that they could control the excess supply wouldn't that make their speculation a self fulfilling prophyy? Would you throw away your money in such a way and in such volumes if you didn't know what was about to happen? Are these speculators sufficiently powerful to speculate against a given commodity and to then proceed to undermine or control the supply accordingly? Isn't that the presumption that you just wont consider?

Again, speculators are simply reacting to what some people have been soap box preaching about for years. Supply can not meet demand.

Maybe they were the one's doing the preaching? Supply have been meeting demand for all of the last five years DESPITE the fact so many supply disruptions took place and/or were staged.

Why else would Saudi Arabia be making new promises to deliver extra oil?

Because they are trying to appear to be doing their best to 'supply' the market despite the fact that they know very well that the market is fully supplied despite all the interruptions and disruptions to various oil producing countries.

Are the speculators going to take this extra 200,000 barrels of oil a day and sit on it without selling it? Of course not.

I don't know WHAT they do it with or whenever they even have to consider all the market devices and tools at their disposal. What i do know is that it's widely admitted that there simply are no real shortages ( according to industry demands) and that if there really is a party('s) that is physically stockpiling oil they have VERY deep pockets.

The extra oil is in the market. The problem is that this extra oil doesn't account for the falling supply from other countries.

Sure there is extra oil in the market and that is my entire extent of my point! The problem is that the added oil is being taken off the market at whatever the price is and that is much harder to explain by supposed market forces alone. Who are the 'hoarders' and how did they know that oil, whatever the price, will now always be a 'bargain'?

Saudi Arabia’s decision to pump more oil than it has in nearly 30 years risks being completely negated by the sharp drop in output caused by attacks on production facilities in Nigeria.

Nigeria now pumps less than 1.5m barrels a day, its lowest level in 25 years, rather than the 2.5m b/d it has the ability to produce

This is what the main stream media isn't reporting on. Their talking heads simply state "Saudia Arabia to increase supply by 200,000 barrels a day".

Yes and there is a great many things the talking heads are not discussing including the very real fact that if not for the very real spare capacity the world's premier oil producers had the supply disruptions that resulted from strikes In Nigeria, Coup's and strikes in Venezuela, the constant disruptions in Iraqi supply would have been truly crippling. As it stands these nations have kept a spare capacity and have in fact done what i consider their near best to supply the market and prevent themselves from looking like power hungry maniacal Arabs. What is even more striking is how there is so much oil left in the US that is simply not being produced to make up the shortfall's that are always blamed on some third world nation or another.

They seem to leave out the fact that Nigeria is down over 1,000,000 barrels a day in it's output. Nigeria isn't the only country that has issues keeping pruduction at full tilt. Mexico, Russia, the U.K. are all slipping in their production supplies.

Declining production in a number of non-OPEC nations, including Mexico, United Kingdom, and Norway, is largely offsetting increases in other countries. Slow growth in non-OPEC supply is coinciding with disruptions in supplies from some OPEC countries, such as Nigeria. Ongoing geopolitical concerns in several producing countries, including Venezuela and Iran, have contributed to oil price volatility.

The market remains concerned that the cushion of surplus production capacity of less than 2 million bbl/d (almost all located in Saudi Arabia) and/or stocks is insufficient to protect against possible changes in supply or consumption, especially as we enter the summer hurricane season. The absence of a Saudi commitment to add capacity beyond its current goal of 12.5 million bbl/d adds to the uncertainty about the adequacy of future supply capacity growth.

www.eia.doe.gov...

So it's ALL fear and paranoia, at best, based on the presumption that the Earth is a volatile place and that the US/Israel might very well turn the world's oil production center into a war zone yet again. There are NO shortages and unless someone can prove to be that Saudi Arabia doesn't have the space capacity it claims it does ( and always seem to have when crisis's arises) i will continue working from the my current information.

Continued

Wouldn't it be a no brainer that if demand stays the same or keeps increasing (Look at auto sales in China) and supply is flat and declining that prices will continue to rise?

Oil demand HAS been increasing despite the fast rising prices and the capacity and demand has been met despite massive disruptions to nations that have NOT even been subjected to decades of war and sanctions.

Why is Iraq such a prize? Not only does it have the potential to become the world's largest producer, but no other country can do it as cheaply. That's because, for geological reasons, Iraq boasts the world's most prolific wells. In 1979, the year before Iraq's oil fields were devastated by the first of three wars, its wells produced an average of 13,700 bbl. each per day. By contrast, each Saudi well averaged 10,200 bbl. U.S. wells, which are gradually drying up, averaged just 17 bbl. It would take more than 800 U.S. wells to pump as much oil as a typical Iraqi well. Consequently, production costs in Iraq are much lower. The average cost of bringing a barrel of oil out of the ground in the U.S. is about $10. In Saudi Arabia, it's about $2.50. And in Iraq, it's less than $1, according to Fadhil Chalabi, executive director of the Center for Global Energy Studies in London and former Under Secretary of Oil in Iraq. What's more, most of Iraq's known oil deposits are waiting to be developed. That's why everyone has cast a covetous eye on the country. And why each one of the world's major powers and international groups has an agenda for Iraqi oil.

"We ought to be able to get their production back up in order of 2.5 (to) 3 million bbl. a day within, hopefully, by the end of the year." For now, at least, U.S. policymakers envision Iraq as a swing producer, one that can provide just enough oil to even out world supply and demand and prop up prices. (If there were a truly free market in oil, crude would sell for $12 a bbl. or less instead of $26, and gasoline would go for less than $1 a gal.)

But would the U.S. actually throttle a country's production to keep the peace? In Iraq, restricted production is an old story. It has often been the victim, ever since oil was discovered near Kirkuk in 1927, within miles of the biblical fiery furnace of Nebuchadnezzar. The Iraq Petroleum Co., jointly owned by U.S., British, French and Dutch oil giants, drilled the first well. It gushed at a rate of 100,000 bbl. a day. That much cheap oil was the last thing the international oil companies wanted. They clamped a lid on the well and sat on the field through the 1930s because the world was awash in oil, and prices were already depressed. Texas crude had fallen from $1.30 per bbl. to 5(cent). Issam Al-Chalabi, Iraq's Oil Minister from 1987 to '90 and a private energy consultant since in Amman, Jordan, told TIME that for Iraq to get production up to 6 million bbl. daily, "we will be talking (of an investment) in the region of $30 billion to $40 billion." A measure of Iraq's potential: only 17 of 80 discovered oil fields have even been developed. Another former Iraqi oil official estimated Iraq could produce as much as 12 million bbl. daily, easily making it the world's No. 1 producer.

www.time.com...

And ultimately that is the reason why the US national security state has been terrorizing the Iraqi people for three decades now. If Iraqi oil were to ever reach the world markets it would have deepened the American economic crisis and as the years passed the severity of dirt cheap Iraqi oil reaching the world markets would have only done more and more damage to the preeminence of the US dollar and the potential of the US government to manipulate world affairs by propping up the failing capitalist system.

It's only obvious. The people investing millions in oil aren't fools. They've been watching all of this take place and are simply buying shares now because a rise in prices is a sure thing.

The people who invest in ever increasing oil prices are no fools ( Who believes that?) and they very well understand that to bet against it is to bet against the entire US military and intelligence establishment failing to destroy any nation who dares to bring oil to the world markets in any volume much larger than satisfies current demands.

Stellar

[edit on 2-7-2008 by StellarX]

Originally posted by dbates

"If all of the supply of oil is really being consumed at the current prices, then it does not make sense to blame those prices on financial investors who are neither supplying physical oil nor consuming physical oil"

- Severin Borenstein, director of the UC Energy Institute

But it's not being consumed as a relatively recent senate report exposed very clearly.

Although these high prices are often attributed to the forces of supply and demand, the report demonstrates that supplies have been more than adequate to meet demand. Since late 2004, the amount of stored oil in the United States has been increasing. Oil inventories recently reached 347 million barrels – an eight-year high and the largest U.S. inventory since 1998, when oil was $15 per barrel. Similarly, oil inventories in Organisation for Economic Co-operation and Development (OECD) countries recently reached a 20-year high. As the report explains, the traditional factors of “supply and demand” do not tell the whole story on oil and gas prices.

What is new, according to the Levin-Coleman report, is that over the past few years market speculators have poured tens of billions of dollars into the energy commodity markets. For example, the International Monetary Fund reports that over the past three years approximately $100-$120 billion has been invested in energy markets worldwide. Over this same period about $60 billion has been invested in oil futures on the NYMEX.

Many analysts believe these speculative investments have significantly raised the price of oil futures. While it is not possible to determine the precise dollar increase in the price of oil attributable to market speculation, some analysts have estimated that speculation has added as much as $20-$25 to the price of each barrel of oil, thereby pushing up oil from about $50 to around $70 per barrel. As former Federal Reserve Chairman Alan Greenspan recently stated, “with the demand from the investment community, oil prices have moved up sooner than they would have otherwise.”

levin.senate.gov...

Are the speculators actually driving up the prices? How? By creating a shortage? If so, then were are they storing all the oil from the contract that they are buying up? In their back yard?

In fact the investors are not storing anything but industry is as they have become aware of the fact that oil is only going to get more and more expensive as time progresses and that the sooner you buy some the more leverage you gain in production costs. As for physical storage of oil what is driving up is the trade in derivatives where you simply speculate against the price of oil without every dealing in either physical oil or even oil contracts.

As Borenstein states, what we're calling "speculators" are in reality simply commodity investors. Any investment in a commodity is a specualtion. They're hoping that the price goes up.

In fact Borenstein must be wrong as while some investors/speculators ( normally in industry) take physical delivery of a commodity, planning to do something other than resell it in the future, the people that are a problem to the market are the investors/speculators who have no use of oil short of the profit potential speculation against it might result in.

When a speculator buys contracts for 100,000 barrels of oil to be delievered in August, he's buying in at say $130 a barrel hoping that the price will go up. How does the purchase of a futures contract create an actual market shortage?

It can create shortages when the investors/speculator does not have any need for oil at that date but fearing rising prices he creates a virtual shortage . As such this market phenomenon is a self fulfilling prophecy where the only crisis in evidence is the fear that a crisis might soon arise or that there are in fact speculative forces in the market that you should NOT bet against if you don't want to lose your very real possession/industrial potential.

It doesn't. When August comes around, the speculator has to sell his contract to a company such as Exxon or Shell. If not then he is the proud owner of an oil tanker with 100,000 barrels of crude oil.

Unless he is trading in derivatives where physical oil never comes into the deal. Even if this was a long term contract it does not much change the fact that the speculator in question where so sure that the oil price would rise sufficiently high ( by understanding that derivatives trading involves far less risk than old fashioned futures) that he could order those barrels and sell the margin that he had no current capacity to store on his own industrial property.

The only way speculators could be driving the prices is if they affected the supply side or the demand side.

You must not be reading the reports where even the US senate admits that derivatives trading can massively increase prices without physical delivery of oil ever becoming the issue. It's not that they take possession of physical oil but the fact that they employ their capitol in the market to create a climate where those with lesser capitol power soon understands that these people not only have the means to profit off future speculation but also the means to arrange the supply disruptions in Iraq, Nigeria or wherever else; it's the realisation that billions of dollars in hedge funds can just as easily buy mercenaries and guns to shoot up oil platforms as it can be used to invest in the knowledge of such events in the future.

Since they neither produce oil, or consume the oil they actually make a minimal amount of difference in the selling price.

In theory i can agree with that but since supply disruptions do seem to happen as they predicted should we forever presume that some small part of those billions of dollars did not in fact pay for the upheaval they traded against? Wouldn't you have considered the potential for creating the exact physical world events that would allow you the greatest profit and if so how long do you think it would take lesser investors to follow your lead knowing that you will make good on your 'threats'?

To state otherwise is junk economics that would be soundly laughed at in any real economics class in the country.

Sure it would, who teaches the classes after all, but that does not change the fact that theory may be benign until it meats hedge funds and the type of people that would starve and destroy entire third world nations if a profit can be arranged in the process. Sure those professors could laugh but naivety is most certainly not a blessing in old age.

I submit, that we have more investors (speculators) in the oil market because there is in fact an actual growing gap between supply and demand.

But since that is just a blatant untruth you should submit it to people who are far more ignorant than myself. There is little credible evidence that there is in fact physical shortages of oil as oil stockpiles all over the world are nearly as high as they were back in 1998 when oil were selling for 8 USD per barrel, with prices still declining, and if there was such a shortage on the world markets it would only result in my being forced to point out that Iraq could today have been producing anywhere between 4- 10 million barrels of oil of the cheapest stuff you can find. If physical shortages exists today they are artificial and should be exposed as such but since they do not the entire argument for peak oil falls flat on it's face.

The investor on Wall Street see this.

Investors on wall street see only where the market is going and since the vast majority of regular investors follow the trend we should rather ask who is setting those trends and how they can be so sure that they can arrange for oil to be so virtually scarce. Aren't those the very same people who basically arranged the invasion of Iraq and doesn't that make more sense than oil suddenly costing 150 USD per barrel while the markets were so flooded with oil in 1998 ( despite the absence of those few million barrels Iraq could easily have contributed) that prices slumped to 8 usd per barrel?

Why doesn't Congress or the Main Stream Media point this out. What we have is a shortage of oil.

They are doing their best to use the opportunity to spread the peak oil message without drawing too much attention to themselves. I don't understand why you could claim that the MSM and congress is not in fact allowing the belief in a absence of supply to spread? What else will the average person believe but that we have used up too much oil? Couple that with the guilt the media is trying to install about 'climate change' ( what happened to 'global warming'? hehe) and you have a perfect storm where generally self respecting and responsible people are trying to 'mend their ways' by 'saving the environment' by using less of the energy they are being indoctrinated to presume in short supply. It's really all very clever and the vast majority of people will be fooled as average people always tend to be.


[edit on 6-7-2008 by StellarX]

Putting the breaks on investing isn't going to change this fact at all.

Why don't we just try and see what happens? It's the same with many other things our governments will try to convince us isn't working while it works so very well. Interestingly government never has a problem with 'regulating' tax breaks so that their friends in industry can be 'more competitive' ( read ' they can buy as many yachts and new cars as they want) on the 'world markets'. It's just striking that government develops a problem with intervention in the 'markets' the moment the average citizen could stand to gain by it.

Increased speculation is merely a symptom of Peak Oil, not the cause.

I would say that the belief in peak oil is merely being propagated to make the speculation strategy in question more effective by properly disguising it.

Stellar

Yeah here are the culprits: www.texemarrs.com...

reply to post by schrodingers dog


Very interesting. Have you ever read the book "Confessions of economic hit man", or perhaps seen any of Lindsey Williams videos?

They imply as you seem to, that the 'speculators' or really the monied interests behind them call the shots, not the government. If the government does move to end speculation (a bad move IMHO), it will be in coordination with these interests. They at that time will be net short oil no doubt.

As I understand it, market manipulation and 'price fixing' is already illegal under US antitrust laws. A better approach would be long jail sentences for the perpetrators, rather than making the oil markets ill-liquid.

reply to post by DimensionalDetective


Weird. What this article is, is pure Speculation. Ironic? Yes sir.