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Oil Talk

wonky discussions of oil pricing and commodities markets

Chris White posted a link

A Few Speculators Dominate Vast Market for Oil Trading

August 23 at 4:51 pm - via Reshare - Link

Sean McBride and Anthony Citrano liked this

"The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders." - Chris White

But the names of no individuals involved in the trading are mentioned? Why are they being protected? Why the lack of transparency regarding activities which so powerfully affect the entire planet? - Sean McBride

Chris White posted two links

Democratic senators question data on oil speculation | Business | Chron.com - Houston Chronicle

August 15 at 5:18 pm - via Reshare - Link

"n fact, speculative, non-commercial trading accounted for nearly half of the oil trading on the New York Mercantile Exchange," the lawmakers wrote. The commission determined "it had been incorrectly classifying a significant number of non-commercial trades carried out by a single large trader as commercial." - Chris White

Oil speculation bigger than we knew: The Swamp

August 15 at 5:17 pm - via Reshare - Link

"Data emerging on players in the commodities markets show that speculators are a larger piece of the oil market than previously known, a development enlivening an already tense election-year debate about traders' influence." - Chris White

Kevin D. White posted a link

Zimbabwe residents turn to gasoline as currency - Gadling

August 14 at 12:27 pm - via Bookmarklet - Link

Kevin D. White posted a link

Offshore Drilling Claims Are a Political Hoax: John M. Berry

August 1 at 2:31 pm - Link

"There are good reasons to question whether another 1 million or 2 million barrels of crude a day would make much difference in prices when world consumption is running at 85 million barrels a day." - Kevin D. White

Kevin D. White posted a link

The Mass Psychological Conversion Experience Theory of Falling Gas Prices

July 26 at 5:46 pm - Link

"If one really believes rising prices are the product of greed, then it seems to me that one must also therefore believe that falling prices are the product of altruism. Thus, the explanation for the turnaround in gas prices in the last week or so must be because oil companies and station operators have had a psychological conversion experience! Suddenly, they have all become (at the same time no less!) much less greedy and much more willing to give consumers a break, right?" - Kevin D. White

I think the response would be something like "the greedy bastards knew they couldn't get away with it forever". - ⓞnor

The opposite of greed in trading isn't altruism, it's fear. - Chris White

Larry Greenfield posted a link

Regulators Say Company Manipulated Oil Market - NYTimes.com

July 24 at 8:30 pm - via Bookmarklet - Link

"Of the five attempts that regulators said were successful, three slightly pushed down the final prices of all three commodities, while two resulted in slightly higher prices for gasoline and West Texas Intermediate." - Larry Greenfield via Bookmarklet

This is why you should mark to VWAP, not closing price. - ⓞnor

Chris White posted a message

“Wow, must have been a huge drop in demand or increase in supply over the last 3 days.”

July 17 at 3:10 pm - Link

Atul Arora liked this

And a big increase of financials at the same time. I guess you need cheap oil to run banks. ;) - Chris White

Why, yes, crude oil inventories did rise unexpectedly (though only 1%): http://www.eia.doe.gov/pub/oil... - Larry Greenfield

Show 3 more comments

The oil correction that everyone said was going to come, finally did. - Morton Fox

Um, this was from last week. Oil started going down on Tuesday. i guess all the speculators took Bastille weekend off. - Chris White

I can't find the schedule. It might be that these reports come out on Monday reflecting the previous week. But both the supply and the demand (and the expectation of future) do seem to move faster than I would have expected. - Larry Greenfield

I'm absolutely positive that it has everything to do with the dollar finally strengthening. http://finance.google.com/fina... - Andrew Burd

The dollar hasn't strengthened very much. More likely, the dollar is stronger because oil has fallen. I've heard what is happening is that large banks are selling their oil futures to raise capital. We have no visibility into how large these banks' holding in oil and other commodities futures are. My hunch is they're huge. That's why we need transparency for oil trades just like we have for the stock market. - Chris White

We have transparency for the stock market? - ⓞnor

Larry Greenfield posted a link

This Week In Petroleum

July 17 at 7:00 pm - via Bookmarklet - Link

Sometimes I love the US Government. The "Energy Information Adminstration" publishes "This Week In Petroleum". They even have RSS feeds for some of their publications! (Warning: there's not much character development in this serial.) - Larry Greenfield via Bookmarklet

And yet they're so dry, even at the height of what most people are calling an unprecedented crisis. I guess you go there for the data, not the commentary. - ⓞnor

Larry Greenfield posted a link

Economic Fears Slice Oil Prices for Second Day - NYTimes.com

July 17 at 3:39 pm - via Bookmarklet - Link

"As a result of higher gas prices and reduced demand, refiners are using less oil. Instead of falling as refiners draw on their inventories as is common at this time of year, oil reserves have been building up. Oil inventories rose 2.95 million barrels last week, to 296.9 million barrels, the Energy Department said Wednesday. Analysts had expected inventories to drop by about 2.2 million barrels." - Larry Greenfield via Bookmarklet

I love how these articles presuppose the reason for a rise in stock or a fail in oil prices. How do they know? Maybe the boats decided to land and sell their oil before it goes down in price. Maybe the banks decided to sell their futures to raise capital. If "Economic Fears" sliced oil prices, why did the Dow go way up today? - Chris White

Because the stock market has become an inverse oil market. - Morton Fox

Morton, I agree. But many times these articles are confusing cause and effect. - Chris White

Atul Arora posted a link

Stop blaming speculators for high oil prices. - By Tim Harford - Slate Magazine

July 14 at 10:27 am - via Reshare - Link

Larry Greenfield posted a link

United States Oil Fund - Daily Holdings

July 7 at 3:04 pm - via Bookmarklet - Link

Trying to understand how oil ETFs work. I believe if we pay attention to this page, we'll see them sell a lot of selling of the Aug08 contract 2 weeks before expiration and buying Sep08. - Larry Greenfield

Why do they hold a billion dollars in cash? What is "Total Net Assets", since it's not a sum of the two "Market Value" figures? - ⓞnor

I puzzled about that over the weekend trying to understand, but I gave up and just posted the URL. - Larry Greenfield

USO seems to be weird. http://seekingalpha.com/articl... ... - ⓞnor

Chris White posted a link

G-8 to call for oil market transparency to curb profiteering - report - Forbes.com

July 7 at 2:49 pm - via Bookmarklet - Link

"The Group of Eight nations are expected to agree at this week's summit to push for greater disclosure in crude oil markets in a bid to improve transparency and check rampant speculation amid record-high prices" - Chris White via Bookmarklet

ⓞnor posted a link

Oily Speculations: Financial Page: The New Yorker

July 7 at 10:37 am - via Bookmarklet - Link

Jim Norris liked this

"But there’s also something else at work, which the oil guru Daniel Yergin calls a “shortage psychology.” The price of oil—more than that of many other commodities—isn’t based solely on current supply and demand. It’s also based on people’s expectations about future supply and demand..." - ⓞnor via Bookmarklet

"Now, it could be that these assumptions are all wrong—that the supply of oil will not be constricted going forward, that concerns about the Middle East are exaggerated, and that higher prices will lead people to cut back on energy consumption, shrinking demand. In that case, oil would turn out to have been hugely overpriced. But that won’t be because of sinister speculators; it will be because oil producers and oil users collectively misread the future." - Jim Norris

Part of the problem with this whole discussion is how the word 'speculation' is used and interpreted. Institutional investors, which means banks, mutual funds, pension funds, etc, have been putting more and more money into commodities as a long term investment. This is being done as a hedge against the devaluation of the dollar, drop in stock market, inflation, and housing bubble bursting. Common sense tells us that when more money is put into a particular area (e.g. oil futures) the price will go up. - Chris White

This article sort of misses the point that the mechanism for setting the price based on "expectations about future supply and demand" *is* exactly this thing called "speculation", alternatively "investment". Chris, common sense might also say that people pouring money into some commodity might try to judge whether they think it's undervalued or overvalued with respect to fundamentals before buying it up, especially if it just had a tremendous run-up. But experience would tell us otherwise... - ⓞnor

@nor, not investing based on fundamentals is definitely part of it, but bubbles often seem to be initiated by relatively free money and/or deregulation. The current run up in oil coincides with 3.25% cut in interest rates since last September. The banks have not been lending much of this money, but instead are investing it in, guess what? - Chris White

Larry Greenfield posted a link

The Big Picture | Crude Oil = $145 (The Trichet Oil Rally)

July 4 at 10:55 am - via Bookmarklet - Link

Here's another correlation: "Here's a question -- at what point does ECB Central Bank Chief Trichet realize that every time the ECB hikes rates, it pummels the dollar and sends oil higher?" - Larry Greenfield via Bookmarklet

What's the connection? Euro rate hike -> people move money from the dollar to the euro -> dollar falls -> ??? -> oil costs more? - ⓞnor

I think the argument is as the dollar falls, not only do people put more money into the euro, but they also put more money into oil. Of course, this all gets back to whether we believe oil futures affect oil spot price and all that. - Chris White

Chris White posted a link

24/7 Wall St.: Super-Sizing the Oil ETF

July 2 at 10:47 am - via Bookmarklet - Link

From January, 2007. Describes a new institutional investor oil ETF called the United States Oil Fund, LP. - Chris White via Bookmarklet

How do oil ETFs work? It says USO is linked to the one month future. Do they hold a basket of futures to maintain that position, and automatically roll? If the proposed legislation passed, would this all just totally shut down? - ⓞnor

Chris White posted a message

“Does fear or speculation that future geo-political events may occur, such as Israel attacking Iran's nuclear plants, or Nigeria shutting off its oil supply cause a rise in either current price per barrel of oil or short term oil futures prices?”

June 29 at 10:27 am - Link

Well, there's that weird effect where something hits the news about trouble in the Mideast or whatever, and *that night* prices at the pump are 50c higher. Seems like it's been that way as long as I can remember (I vaguely recall my parents decrying this as ridiculous in the mid '80s), which if true would imply pricing hits the spot market for oil and oil products very quickly. - ⓞnor

This is the effect of speculators being very efficient: if the spot price doesn't immediately rise but the future price rises (because "everyone" thinks war is coming in 2 months) I'll just buy spot, sell future, and pay the storage costs and pocket the profit. (But then the market must be in contango.) While I don't think gasoline is traded as efficiently, I'm sure refiners can engage in similar contracts that encourage them to stockpile. - Larry Greenfield

ⓞnor posted a link

Economist's View: Another Iteration on the Speculation Model

June 28 at 2:39 pm - via Reshare - Link

rutawa liked this

Mark Thoma's thoroughly worked out model of the commodities market (including futures, storage, and speculation). Krugman gives this guy props and agrees with the conclusion, which is that the data does not support speculative investment in commodities, but instead a repricing due to changes in supply and demand. I think some factors are left unaccounted-for, though. - ⓞnor

I bet Krugman owns an oil index. Just watching the markets on Thursday and Friday have me convinced this is money flowing from the stock market (primarily financials) into the commodities markets. There was no new economic data to support the rise in oil prices last week. - Chris White

Show 13 more comments

You mean you think Krugman is corrupt? Because I think that's ridiculous, and doesn't bear on the validity of his arguments anyway. Or you're making a point about how widespread indirect ownership is? In any case, I don't really buy your proof by inverse correlation, and I think the points raised by Krugman et al. really have a lot of validity of them. Oil supply and demand fluctuate like anything else, and everyone gets bearish when people see oil prices putting the squeeze on the economy. - ⓞnor

Prices are being passed on to consumers, that's why the gas prices are going up. Supply and demand are roughly what they were 6 months ago. If lots of people invest in a stock, it goes up. It's not different for the commodities markets. Eventually the stock market will turn around, and then oil prices will come down. Will people be saying there is decreased demand then? - Chris White

Just to clarify, oil demand is inelastic because it's a necessity for many people. They have to drive to work, heat their homes, or travel for business. This makes it a good target for price increases. You don't need decreased supply to raise prices if the demand is inelastic. Some blame OPEC, which could be true, but I think more likely it is institutions bidding up the price of oil through index funds. The oil isn't being stored because it's being used at these high prices. - Chris White

The only way to fix the problem is change the minds of the investors. This could be through vastly less demand, more supply, alternative energy, or threatened legislation against speculation by institutions not associated with the oil industry. I think the last one is probably the quickest remedy. - Chris White

Trying again: speculators cannot raise the spot price of oil without stockpiling it somewhere or convincing producers not to pump it in the first place. There's no good evidence either of these are happening. On the other hand, since oil demand is inelastic, very small changes in supply or demand can make very large differences in price. - Larry Greenfield

(I think Chris may have gone output-only?) But as Krugman himself admits, absence of evidence is not evidence of absence. At this point I don't fully buy Krugman's theories about signals in the forward price curve: crude futures have wandered between contango and backwardation for as long as we have data; investment pressure ("speculation") is clearly not the only thing driving that curve. Futures can push spot by putting pressure on that curve whichever direction it is going. - ⓞnor

Also, the cheapest way to store oil is to not pump it. In an arbitrage situation the cheapest solution should dominate, so I expect futures pressure to show up as less source pumping, not overflowing storage tanks. It's hard to tell whether supply is dropping (and it is dropping) because the oil producers can't pump any more, or because they choose not to for pricing reasons. - ⓞnor

Are producers deciding not to pump oil speculators? I don't think so. - Larry Greenfield

@nor, output-only made me laugh. :) No, I was joking about Krugman owning an oil index fund, sorry, but he does seem to speak from a particular political point of view, which makes me wary. Larry, no I don't think producers not pumping are oil speculators. I don't even think oil speculation is inherently bad. I do have a series of questions about the oil market though. Maybe I'll ask them separately. - Chris White

Oil speculators could drive up futures, which would cause producers not to pump, which would drive up spot. Or producers could engage in some speculation of their own. (Surely ginormous oil companies employ smart people who spend lots of time trying to forecast prices and understand markets, and speculation is the next logical step.) - ⓞnor

@Chris: there's a big difference between stocks and barrels of oil—oil is consumable. The price should be determined by the equilibrium between rates of supply and demand (buffered by inventories), not by the aggregate total. - Jim Norris

The assumption behind investment impact would have to be that these funds aren't just holding a big pile of oil, they're actively buying more over time. (Which means that by now they should be sitting on the equivalent of an enormous hoard of oil.) - ⓞnor

That would explain the squishy feeling in their pants... - Jim Norris

I'm sure I'm missing something, but couldn't the index fund just sell the option to buy oil back to the oil importing companies when the futures come due at slightly below spot prices? - Chris White

That's what they do, selling the futures off to people who actually want the oil. But they want to maintain asset allocation, so they turn around and buy more futures further out ("rolling forward"). So they never own *actual* oil (that would be squishy, as Jim says), they own virtual oil, in the form of an ever-increasing pile of constantly-rolling futures. - ⓞnor

But that means they're exerting a downward force on the spot price, since they're selling an ever-increasing pile of oil for near-term delivery. The argument for speculators influencing the price is that if they convince producers that oil prices are forever going up, the producers drop supply. - Larry Greenfield

Chris White posted a link

“Oil vs Finance ETF chart”

June 29 at 11:39 am - via Reshare - Link

rutawa liked this

"This is a pretty interesting graph of the financial sector going the opposite way as the oil market. It seems very likely funds are flowing from one to the other, the question is whether this is based on external events or a bubble." - Chris White

I've heard oil producing countries were heavy investors in US financial stocks. Is it possible they sold off a lot of them and bought oil index funds? - Chris White

Or, as the other article says, just sold them off in lieu of pumping oil, which is sort of the equivalent of buying oil funds (only less noticeable). - ⓞnor

Maybe, but it would have been smart to convert those dollars to euros. But then again, it would have been smart for me to convert my dollars to euros. :) - Chris White

Larry Greenfield posted a link

Oil Market Oversupplied But Not Wise to Cut - Qatar - NYTimes.com

June 29 at 6:28 am - via Bookmarklet - Link

Qatari Oil Minister denies supply problems: "There is no coordination between supplies and the oil price. We believe that the market is not facing any shortage of supplies at the moment. There are some cargoes in floating storage. More crude will not benefit the market." - Larry Greenfield via Bookmarklet

OPEC keeps saying that the world is "saturated" with oil. It's such a bizarre thing to say. Production is down, consumption is up, prices are through the roof, and they are really claiming that increased supply would have *no effect* on prices? What exactly are they claiming is going on? Is this anything but the kind of lie that's so staggering that you sort of halfway believe it? - ⓞnor

"I never get a call from my customers asking for more supply but we always hear concerns about high oil prices. This shows there is no correlation between the oil price and supplies." That's such a bizarre statement I barely know where to start. The comments about "reservoir management" are also strange; what does it mean to "damage" a reservoir? Isn't "reservoir management" just a way of limiting current supply and betting on future price increases? - Jim Norris

OPEC is in a PR bind, I think. They can't admit that they are unable to supply more, and they can't admit that they are unwilling, so they have to make up a weird story about how it's all speculators' fault. And people buy it, too: Congresscritters just the other day were actually citing OPEC to support their claims that we needed to crack down on speculation. - ⓞnor

Reservoir management: if you pump too fast, various bad geophysical things happen, I don't know the details. When the Saudis went on their pumping binge in the '80s it apparently had a bad effect on their reservoirs, which took a lot of time and money to repair and work around in the decades since. Though in this case it seems like an excuse. - ⓞnor

Chris White posted a message

“Should I buy a bunch of USO?”

June 29 at 11:52 am - Link

Chris White posted a link

Market power, asset allocation, and oil prices

June 29 at 11:20 am - via Reshare - Link

"The price of oil to discretionary producers is not measured in dollars, but in the future purchasing power of the assets dollars can buy. If oil producers expected US financial assets to appreciate in value more quickly than oil (in terms of what they want to buy), President Bush wouldn't have to look anyone in their eye to get the producers to invest in new wells." - Chris White

This seems to relate the the chart I posted: http://friendfeed.com/e/49d9e5... - Chris White

But you can turn dollars into euros, or any other currency you like, and then buy things with that. "Real interest rates on "safe" dollar assets are currently negative, both in US and home country terms" - how is that? But the basic idea here seems to be that major oil producers really are speculators (or "investors"), and that as oil becomes a more attractive investment, they hoard and underproduce. - ⓞnor

These things might feed on each other. Institutional investors buy futures, supplies dwindle, demand grows, all of this pushes the price up. Increasing prices attract more investment, and also encourage major suppliers to hold back (basically entering the investment pool), and prices go up further. But this all requires them all to be the lame kind of investor that buys after the price goes up, on the assumption that it will keep going up. - ⓞnor

This works pretty well as long as you know when to bail out. - Chris White

Chris White posted a link

"The future of energy" by David Shvartsman, FSU Editorial

June 29 at 11:32 am - via Reshare - Link

"You have 85 million barrels a day of oil available in the global energy market and 86.4 million barrels a day of demand. So the price of oil is going to go up until you can kill demand." - Chris White

Or increase supply—at some price point it becomes profitable to extract oil from tar sands, or oil shale, or squeeze it out of turnips. - Jim Norris

Yes. In the near term (6-12 months) supply and demand are both quite inelastic. How elastic are supply and demand over the next 5 years? That seems like a really interesting question. - ⓞnor

Larry Greenfield posted a link

The World - One Reason Gas Is Emptying Your Wallet - Nigeria - NYTimes.com

June 29 at 6:25 am - via Bookmarklet - Link

"As the damage has mounted and some companies have closed down operations, Nigeria’s oil production has slipped to 1.8 million barrels per day, which is far below its production capacity of about 2.8 million barrels." - Larry Greenfield via Bookmarklet

Woo, can we invade? We can put them on the Axis of Fucked Up, and then maybe occupy the country in a quagmire that makes Iraq look like a shining success. That would be so awesome. - ⓞnor

Chris White posted a message

“In the past year, has there been a significant overall decrease in the supply in oil, or a significant overall increase in the demand of oil? If so, what is the total world deficit in barrels of oil?”

June 29 at 10:22 am - Link

Both, according to http://www.bp.com/subsection.d..., at least. Production is 81.5mbbl/day; consumption is 85.2mbbl/day. I guess that means 3.7mbbl/day are coming out of reserves (1.2mbbl more than last year)? I don't know where BP gets their numbers, or how reliable they are. - ⓞnor

Chris White posted a message

“When investors buy shares in an oil futures index fund, and the price per share of that index fund goes higher, does this in any way affect the price per barrel of oil?”

June 29 at 10:19 am - Link

That's the huge question at the center of all the noise about "backwardation" and "convenience yield" and all that. Directly, no it doesn't. Indirectly, surely it does, by people of various stripes who arbitrage between the futures market and the spot market. Krugman argues that such arbitrage at a large scale, which would be necessary for institutional interest in futures to be driving spot oil prices in a large way (which is the Masters theory), would leave visible signatures in the market, and that we aren't seeing those signatures. Others disagree, it's not a simple question. - ⓞnor

ⓞnor posted two links

The Oil Drum: Europe | World Oil Exports [00] Introduction

June 28 at 2:13 pm - via Bookmarklet - Link

You've heard all the peak-oil stuff before, but the charts are interesting, especially the supply curve scatterplot, which is a nice illustration of inelasticity (in the short term at least). - ⓞnor via Bookmarklet

Interfluidity :: The convenience yield

June 28 at 1:38 pm - via Bookmarklet - Link

"If a commodity is in "backwardization", that is, if futures prices are lower than current prices, does that imply that futures markets are discouraging storage (encouraging disgorgement)? Paul Krugman makes the case, here and here. I'm going to challenge him with a low-down, dastardly kind of argument." - ⓞnor via Bookmarklet