This error culminates in their thinking that speculators and geopolitical threats are artificially inflating the price of oil beyond what the “fundamentals” support as if that’s possible. Here’s the problem: oil futures are deliverable. Every owner of a future contract on the NYMEX can hold that contract to expiration and actually take delivery of 1000 barrels of oil at Cushing, Oklahoma. Admittedly, most contracts will be settled for cash and won’t result in actual delivery, but their value can’t depart from the actual value of delivered crude because, if it did, one party would simply take delivery and collect the difference. So there you have it: the price of oil, as a deliverable commodity, isn’t subject to a speculative bubble like stocks are. The price of oil will always equal that which the end consumers of oil will pay for oil-derived products. If speculators bid the price of a futures contract to $100 when end consumers are only willing to pay, on average, $50 equivalent per barrel for oil-derived consumables, one of two things happens: consumption declines (this is called demand destruction); or someone is taking a bath to the tune of hundreds of billions of dollars settling his expiring contracts because no one is willing to pay $100 at delivery.
It appeals to my plain sense view of the price of commodities and the market being "what someone else is willing to pay for it" that I learned when I attempted to liquidate my baseball card and comic book collection when I was 14. If someone can correct his view i would love to hear why. _________________ Nature is complete because it does not serve itself.
The sage places himself after and finds himself before,
Ignores his desire and finds himself content.
He is complete because he does not serve himself. -Lao Tze
Posted: Sun Nov 11, 2007 1:34 pm Post subject: Re: oil markets and speculation
So in other words,in a short supply situation for such an important commodity as oil they can keep raising the price because they know people will pay anything to get it.It kinda reminds of a junkie addicted to heroin who'll steal from his own mother and pay any price to get it.Short supply and rampant greed,boy,are we screwed.
Posted: Sun Nov 11, 2007 2:07 pm Post subject: Re: oil markets and speculation
bonehead wrote:
So in other words,in a short supply situation for such an important commodity as oil they can keep raising the price because they know people will pay anything to get it.
"Will pay" and "can pay" are two very different things. We are indeed crude junkies, but prices cannot be sustained at absurdly high levels very long before a total collapse, economically speaking, sets in. _________________ "It's called the American Dream because you'd have to be asleep to believe it."
Posted: Sun Nov 11, 2007 2:23 pm Post subject: Re: oil markets and speculation
bonehead wrote:
What do you guys think the world's "can pay" cutoff point is before a worldwide economic collapse happens?Opinions please.
It depends on whether hyperinflation kicks in, but I'd say a steady incline towards $250-300/bbl makes for a eventual worldwide depression. A $500/bbl superspike would similarly result in a calamitous fallout.
This is just my unprofessional opinion, of course. _________________ "It's called the American Dream because you'd have to be asleep to believe it."
Posted: Sun Nov 11, 2007 2:30 pm Post subject: Re: oil markets and speculation
bonehead wrote:
What do you guys think the world's "can pay" cutoff point is before a worldwide economic collapse happens?Opinions please.
It is like sitting at a poker table and thinking you know how the other players will respond to your bluff. There are too many variables. At some point, however, an "every nation for themself" attitude will be announced, then there will be a melt down.
The key is to be done hoarding before that announcement comes down the pike.
But if you want an uneducated guess: $160.00 a barrel, August 2008.
Who knows someone has to win the lottery, right? _________________ Nature is complete because it does not serve itself.
The sage places himself after and finds himself before,
Ignores his desire and finds himself content.
He is complete because he does not serve himself. -Lao Tze
Joined: Oct 18, 2004 Posts: 1955 Location: kiwibush
Posted: Sun Nov 11, 2007 6:12 pm Post subject: Re: oil markets and speculation
wisconsin_cur wrote:
bonehead wrote:
What do you guys think the world's "can pay" cutoff point is before a worldwide economic collapse happens?Opinions please.
It is like sitting at a poker table and thinking you know how the other players will respond to your bluff. There are too many variables. At some point, however, an "every nation for themself" attitude will be announced, then there will be a melt down.
The key is to be done hoarding before that announcement comes down the pike.
But if you want an uneducated guess: $160.00 a barrel, August 2008.
Who knows someone has to win the lottery, right?
Residential real estate. _________________ Bugger me, I hear oil's runnin out mate!
Posted: Mon Nov 12, 2007 3:48 am Post subject: Re: oil markets and speculation
wisconsin_cur, you are probably right. I wrote last week why the WTI contract on the NYMEX is really a stranded local contract and not really a global benchmark, but that does not diminish its role as a benchmark because some of the largest indices are based on WTI.
For example, the GSCI is 50% energy, of which 50% is WTI. While Brent, which is just as significant global benchmark contract based on trading volumes, is only 5% of the GSCI. That leads to severe distortions.
UPDATE:
Quote:
Brent crude is a blend of oil from several fields in the
northern part of the North Sea, including Ninian and the Brent
field itself. The blend is one of the four North Sea crude
grades used to determine Dated Brent, the price benchmark for as
much as two-thirds of the world's oil, from Russia, Africa and
Europe.
Source: Brent Crude Oil Exports May Plunge 17% Next Year
Nov. 9 (Bloomberg)
However, the price of crude is a complicated web of transactions where futures prices and physical cash markets meet. For one you have geographical arbitrage. If one market climbs to high relative to others supply can be diverted and delivered against the over-priced contract. Ditto for under-priced contracts.
Secondly, the spot or near dated futures price is linked to the forward curve or long-dated futures price. If one becomes to cheap it encourages physical traders to store oil and deliver against the far date at full-carry. In otherwords the market is paying them to store crude.
On the other hand if spot prices are too high then it encourages spot users to either wait to buy their own physcial needs just in time and/or buy the forward future contract and wait to take delivery as spot and forward prices converge.
Alternatively, if spot prices are too high or too low they can express themselves through the refined products market. The crack spread can widen or contract in response to changing supply and demand fundamentals, but also in response to changes in crude prices relative to product prices. Refiners objective being able to time the market to maximize their own spreads between buying crude and selling finished products.
Therefore, speculators do have an effect on spot prices, and by default forward prices and cash markets as well. But physical players have an advantage over paper traders because they control the pipes and storage, so they can more easily arbitrage between futures and cash markets. Not only that, but they have a better feel for real supply and demand because they are closer to those fundamentals than hedge investors or speculators in general.
But one would never the less have a hard time taking delivery of WTI in Cushing, Oklahoma, and turning around and delivering it against a cash contract in Yokohama! ; - ) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
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