Its not a matter of its too high or not, its a matter of the market is willfully and intentionally manipulated, just like the stock market oh say circa 1999/2000.
There is not one remote supply or demand justification in terms of end consumer for the price of oil today... just a bunch of middle men leeching and manipulating the system.
Futures trading in the energy market is just manipulation and gougin, pure and simple.
Two remarks regarding your post
One, when Katrina and Rita hit the futures sham was revealed. The prices remained steady, and actually fell, in the wake of the storm. Had the market been based on true supply and demand, prices for the commodity would have soared to $100 per barrel.
Second, if the opposite news came out from the EIA (as it did December, 2005) futures prices would have jumped. I recall refined gasoline trading at close to 1.40 per gallon and dropping when the EIA stated inventories were lower than expected (what happened to that report?). Then NOAA issued a bulletin stating the Northeast would be hit by a cold winter. Neither forecaast was an actual fact. But facts don't matter in speculation.
Here's an interesting article
The Energy Outlook Changes
If you stayed out of the oil futures line dance, you don’t need rose-colored glasses right now
By Ed Wallace
Special to the Star-Telegram
“Spot oil prices would have to climb to $77 a barrel this year for those futures investors just to break even.”
Contango: A condition in which distant delivery prices for futures exceed spot prices, often due to the costs of storing and insuring the underlying commodity. — www.investorwords.com
Last week this column ended with a prediction that, if the average middle-class family could get a break on its energy costs — gasoline, electricity or natural gas — or hit the trifecta and see all three of those costs fall, America’s automobile industry could see a substantial improvement in sales. Little did I know that even as that column was being written, a silent seismic shift was beginning that may have started moving us in that very direction.
Now, on the face of it, one would think the energy world was not in as dire straits as we’ve been led to believe.
Bad News or PR Campaign?
The International Energy Agency, which advises 26 industrialized nations, reported that in January OPEC countries watched their oil production fall by 450,000 barrels per day. The primary causes of this decline? The United Arab Emirates had taken their system offline for maintenance; rebels in the oil fields of Nigeria were on a rampage; Iraq is still Iraq, and so on. This loss, moreover, doesn’t include the 220,000 bpd that Russia, which suffered unusually harsh winter conditions last month, couldn’t ship. Further, according to our own Energy Information Administration’s “Short Term Energy Outlook” paper, published Feb. 7, 255,000 barrels a day of oil from the Gulf of Mexico will remain off line right up to the start of this year’s hurricane season — as will 400 million cubic feet of natural gas per day. The IEA report also mentioned that the daily buffer for petroleum had fallen to a mere 1.4 million barrels a day. Mixing in all the other geopolitical uncertainties, you’d think that the world’s energy supplies had become even more uncertain than they’ve been for the past two years.
For two years some people deeply involved in trading oil and natural gas futures have seemed to be moonlighting on network television, playing energy gurus. They’ve been steadily shown predicting not only that the world’s economy as we know it will end soon — when Peak Oil hits and prices for crude can no longer be contained — but also that the Saudi oil wells are just about empty. But, their one-sided, negative and almost fatalistic outlook notwithstanding, there appears to be far more to this story.
Know What You’re Hearing
Watch any network’s morning news program and you’ll hear the previous day’s closing price for oil on the futures market, followed by speculation about what the price of gasoline is going to do in the near future — as if the price of oil were the only factor involved. But the oil prices that we so often hear quoted are for light sweet crude; you don’t hear the substantially discounted prices for the lesser grades of oil. OPEC’s “basket price” figures take into account the prices of both the more expensive, sweeter crudes and their sour grades.
The factor most often overlooked in the discussion of future gasoline prices is the margin of profits that refiners make per barrel. Few realize that last Sept. 1, shortly after Dennis and Katrina destroyed so much of the South, Bloomberg reported that refiners’ profits had hit $31.07 per barrel.
And so from September through December we watched as the price of natural gas climbed to $15.40 per million British Thermal Units; gasoline hit $3 a gallon and more at the pump; and our own electric rates were slated for two large increases to meet those of natural gas futures’ prices.
Last month we watched oil jump briefly back over $70 a barrel, and this year looked to be a repeat of last in terms of steadily increasing energy prices. But today the near energy future looks markedly different.
Thank Goodness That Fad’s Out
First, it should be noted that a week ago Friday, the government released data showing that we now have a near record amount of natural gas on hand due to the milder than normal winter we’ve experienced. As a result, reserves have hit a 17-year high, which has caused the market prices for natural gas to collapse; now they’re at less than half of December’s rate, a mere $7.32 per million BTUs. One has to wonder whether, in this era of electric deregulation, our larger electric companies will now ask the state for permission to lower their rates for spring.
Second, I’m enjoying reading other states’ discussions about the identical problems they’re having with deregulated electric utilities. Some Republicans in Delaware must not find the situation as entertaining as I do; they say it’s time to reverse this ill-thought-out legislation — obviously, the industry needs some regulation. But refinery profits are nowhere near last September’s high of $31.07 per barrel; in fact, that profit margin has disappeared. Bloomberg Financial reported on Feb. 10 that profits are now a mere $3.086 per barrel refined — and the profit for “turning crude into gasoline fell below $1 per barrel for the first time since September of 1994.” Refiners may even be losing a little on each barrel as a result of the 90 percent decline in refinery profits.
And third, a couple of days before Bloomberg’s report came out, the Department of Energy released inventory data for the week showing that we had again put over 4 million barrels of refined gasoline into reserves — for a total gain of more than 20 million barrels over the previous six weeks. And, while oil supplies on hand fell by 300,000 barrels, amounts of crude oil, heating oil, gasoline and diesel on hand now have all surpassed their five-year averages.
However, by the time I heard these numbers I’d already read some shocking and certainly underreported news.
The Contango: It Only Takes One to Dance
On Tuesday, Feb. 7, Reuters Business Asia reported Deutsche Bank’s warning about just how high the spot oil market price would have to go this year to cover futures traders’ losses in the oil market contango. That’s right: Deutsche Bank says that oil futures have been in contango since November of 2004. In layman’s terms, the spot market price for oil has consistently been lower than their oil contracts obligated futures traders to pay.
This circumstance encourages oil companies to build reserve stocks, because they can make more by storing crude oil and reselling it later. But that doesn’t mitigate what Deutsche Bank’s warning concerned: spot oil prices would have to climb to $77 a barrel this year for those futures investors just to break even.
From the day that warning was issued, we watched the price of light sweet crude fall; early this week it was selling for less than $61 per barrel. Meanwhile, gasoline futures fell to $1.40 per gallon; that’s an indication that we might soon see retail gasoline prices under $2 again.
In the middle of all this, the Wall Street Journal reported that Congress is working on legislation that would give the Commodity Futures Trading Commission more enforcement authority to regulate the energy market. Seems “energy users [were] complaining that shortages of natural gas have created a market dominated by speculators who manipulate prices.”
“Positive” Pressures
So now we know. The oil market has been in contango for the last 13 months; spot prices are actually lower than the higher numbers we are told (future) oil contracts are going for. The price of natural gas has fallen by 50%, while refinery profits are down 90 percent from last September. All of this, furthermore, is happening during a period when OPEC lost 450,000 bpd, Russian oil production was off 220,000 bpd, and our own Gulf of Mexico production is still short 255,000 bpd. And yet we are now sitting on a 17-year high for natural gas; gasoline reserves are up 20 million barrels over the past six weeks; and diesel and oil reserves are higher than they were Jan. 1.
That’s good news: Our energy industry apparently has done an exceptional job of improving America’s buffer for oil products — and, according to statistics, has done so in a very tough environment. Yet I must issue a word of caution: the industry is still vulnerable to major disruptions, whether they be acts of God or of people claiming to be acting on God’s instructions. But, with another two million barrels of oil per day due to come on line this year — and the market already in the red, praying for $77 a barrel prices to fix traders’ losses — maybe reporting more of the positive downward pressures on oil and gas prices might stop the feeding frenzy in this market for a little while.
On the other hand, this just in from our “Have-they-no-shame” department: The New York Times reported last Tuesday that our Interior Department’s budget plan for 2006 will allow oil and gas companies to take $65 billion worth of oil and gas from federal lands without having to pay royalties to the government. Maybe that will soften the pain of years of record oil profits.
Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day and hosts the talk show Wheels Saturdays from 8:00 to 1:00 on 570 KLIF. E-mail:
ed-wallace@charter.net