Posted on 07/04/2008 5:53:48 AM PDT by kellynla
This is absolutely, 100% true. Supply has been flat for a number of years and, under present conditions, even a small change can make a huge difference in price.
But that leaves open the question "Is supply flat because producers are holding back or is it flat because there's no more to be got?"
For me the best indirect evidence is the shape of the discovery curve. Hubbert discovered that the discovery curve anticipated the production curve - to a high degree of accuracy - by about 40 years and both are bell shaped.
As for direct evidence, I'm out of my depth. But I'll but someone in the business, someone like Matt Simmons, would have a pretty convincing answer. In fact he wrote a book about it "Twilight in the Desert".
As well they should.
Until the political issues get resolved. Only then would it make sense to go short and/or exit the long side.
I'm personally long oil via stocks. And will remain so until the politics of oil indicate otherwise, i.e. expanded supply via drilling and exploration.
Approx 75% of speculators in the futures market are currently long as of June 24.
He raises a good point.
Though I do believe that refineries need to buy their oil on the futures market in order to ensure a smooth and continuous supply of oil. And if speculators are in the futures market as well, then the refiner has to bid higher than the speculator in order to buy a barrel of oil.
Thus, increasing the number of buyers naturally increases the cost. And removing buyers reduces demand.
But the speculator sells the future before settlement day. If all the speculators were bidding up the price, but not taking delivery of the oil, refineries could wait until the speculators rushed to sell their contracts and buy them up cheap.
Refineries can’t play games like that. If they did, and it turned out badly, their customers (you and me) would have no gasoline to fill their gas tanks.
So it really doesn’t matter if the speculator sells at a later date, as those (such as refineries) have already secured their supply of oil... at whatever price was high enough to outbid the speculators.
So you're claiming that speculators make the price go up when they buy but have no impact on price when they sell?
It’s a sellers market, what with everyone trying to outbid one another.
Saudi Arabia can attest to that. They’re quite worried about how high the price of oil is, regardless of what they do.
Great. So you think that a speculator forces the price up when they buy a contract. Then, as settlement date approaches, they sell the contract, but not to someone who might take delivery (that would reduce the possible buyers).
This "forced sale" to a limited set of possible buyers then has no impact on the price. Interesting idea about economics you've come up with.
It works like this:
I have $20, you have $20.
I use oil to make things, you do not.
I go to the seller (who only has one barrel for next month) and offer $5 for next month’s barrel.
You wager that, because I need the oil, you could bid $6 for the barrel and then make $8 off a quick reverse sale back to me.
So, because you’re there, I now have to bid $7. To which you bid $8. And so on, and so on.
Eventually, the price for the barrel *WILL* be $20. But only because you’ve finally realized that you won’t be able to sell me the oil at a profit if you’ve bought it at $20, because I only have $20.
But anything up to $19 is fair game.
Had you not done so, the price of the barrel would be $5, as I’d have been the only bidder.
Eliminate the speculator and you remove a significant portion of buyers in the world oil market. Reducing the number of buyers reduces prices.
You're funny.
I go to the seller (who only has one barrel for next month) and offer $5 for next month’s barrel.
I thought we were talking about futures trades? You don't know who you're buying from on the exchange.
You wager that, because I need the oil, you could bid $6 for the barrel
If I bid $6 when oil is trading at $5, I'd be a fool and I'd also own a lot of futures contracts.
So, because you’re there, I now have to bid $7.
Now you're the fool who owns lots of contracts.
Eventually, the price for the barrel *WILL* be $20. But only because you’ve finally realized that you won’t be able to sell me the oil at a profit if you’ve bought it at $20, because I only have $20.
And oil speculators know how much Exxon is willing to pay? How much Exxon has to spend? That's funny.
Had you not done so, the price of the barrel would be $5, as I’d have been the only bidder.
You have an interesting idea about how markets work.
Eliminate the speculator and you remove a significant portion of buyers in the world oil market.
Don't buy the contract when the speculator tries to sell at the last minute, you'll see a huge drop in the oil market. LOL!
So you finally recognize that there is a limited amount of futures contracts... and if you pay more for them than everyone else, you get them all.
And anyone else that needs to have a guaranteed supply of future oil... now has to either buy it from you, or pay more than you for the oil on the exchange.
And oil speculators know how much Exxon is willing to pay? How much Exxon has to spend? That's funny.
Of course the speculators know what price Exxon(or oil company) is willing to pay. It's the lowest price possible to get the goods. And as long as the speculator is there, buying up the goods while disregarding current prices, because they expect future prices to be higher, then Exxon must pay whatever the price is to get the contract. And no one sells to the lowest bidder.
Don't buy the contract when the speculator tries to sell at the last minute, you'll see a huge drop in the oil market. LOL!
And why would a speculator sell at a price point less than what they paid? If you think that 'having to take delivery' is a problem for speculators... you'll need to think again. If it was a problem, we wouldn't see hedge funds making long-term investments into oil futures.
Yes, that's right, LONG TERM investments.
No, there are an infinite number of possible contracts. You can create them out of thin air. At a moments notice.
And anyone else that needs to have a guaranteed supply of future oil... now has to either buy it from you, or pay more than you for the oil on the exchange.
Since the spec is not going to take delivery and you think a refinery won't buy contracts at the last minute, the spec is going to lose his shorts when he has to sell to another spec before settlement date.
Of course the speculators know what price Exxon(or oil company) is willing to pay.
You're funny.
It's the lowest price possible to get the goods.
Not the $20 in your example?
And why would a speculator sell at a price point less than what they paid?
Because the 1000 barrels for each contract won't fit in his basement.
If you think that 'having to take delivery' is a problem for speculators... you'll need to think again.
You don't know much about commodity markets.
If it was a problem, we wouldn't see hedge funds making long-term investments into oil futures.
What makes you think hedge funds take delivery of oil?
You really aren’t convincing me. You’ve made no point, only rebuttals. And your rebuttals are more sarcastic than informative.
So, in essence, you’ve only convinced me that you simply don’t like my point, not that my point is wrong.
And, well, that strikes me as the actions of an ostrich, ignoring reality to put one’s head in the sand.
Like I said, interesting ideas you have about markets.
No, but 1000 investors buying $20 million or more worth of contracts sure does.
Yes, large numbers of investors buying contracts will make the price rise. Large numbers of investors selling contracts will make the price fall. Glad I could help.
So why are you arguing, you’ve already conceded my point.
Your point was a spec purchase makes the price rise but a spec sale doesn't make the price fall. I'm not conceding your point at all. LOL!
B.S. there are thousands bidding for that barrel of oil because there is a huge demand for it. Tell me, where are all of the full storage tanks? Speculators are a good thing to have. The futures allow managers to plan for their coming budgets. Do you think the speculators just realized a few years ago that they could manipulate the price of oil? Get real.
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