Oil Prices: Speculation or supply and demand?

[Vanguard]

The run-up in prices is the result of speculation, because almost all trade in oil is "speculation". Oil isn't at $130 a barrel due to the need for new investment in oil fields. Nor is it due to demand, since current prices are causing demand to fall rapidly.

Of course, technically, much of the price increase could equally well be said to be due "hedging". But in this case, for purposes of discussion, hedging can be lumped with speculation.

[Imran Siddiqui]

Nor is it due to demand, since current prices are causing demand to fall rapidly.

And thus, crude prices are falling..

http://www.livemint.com/2008/07/21235015/Global-crude-oil-demand-growth.html

Demand may grow by 790,000 barrels a day this year, much less than the estimated 1.5mn barrels a day
Oil demand may grow by 790,000 barrels a day this year compared with an estimate of 1.5 million barrels a day made at the start of the year, Lehman analysts led by Edward Morse said in a report on Monday.

The contract settled at $128.88 on 18 July, the lowest close since 5 June. Prices dropped 11% last week, the most in more than three years, on signs of slowing global growth and lower US fuel demand.

So, it appears that lower demand growth is resulting in a lower price, contrary to what you are asserting.

Of course that's offset by:

China and India continued to consume more oil driven by electricity shortages and fuel substitution. China’s oil demand rose by 4.7%, or 350,000 barrels a day, in the first half of this year, slower than 7.1% growth in the first half of 2007.

Demand for oil in India grew by 4.7% in the first half of this year led by fuel substitution as industries burn subsidized diesel instead of more expensive fuel oil, the report said.

[Aeson]

Originally posted by Kuciwalker
edit: except, that's still not really the case. Ultimately the people selling the futures contracts are the oil companies; they're entering into a deal whose value is negatively correlated with their main assets (oil production). So they don't really benefit from the drop in oil prices.

No, anyone can short the underlying. You don't have to own it. Read all of Oerdin's posts and you'll understand that this is the type of "speculation" he is talking about. People buying and selling contracts, when the underlying never changes hands (for that transaction).

Inasmuch as the speculators hedge their bets sufficiently, price manipulation doesn't really hurt them.

All you're doing here is confirming what I said. Only half the speculators get hurt, those that are long. The other half get helped, those who are short. Someone who has hedged is in both groups, with both long and short holdings (directly or indirectly). Their longs get hurt and shorts get helped by the extent of the drop of the price of the underlying.

Besides, "speculators" denotes someone betting on price movement, which doesn't really fit in well with being hedged to the point where price movement doesn't affect your holdings.

[Vanguard]

Commodities do not double in price due to gradually increasing demand.

The fact that the price oil is falling with slackening demand doesn't prove anything about speculation. Clearly the run up in prices was not the result of oil users bidding against one another to obtain oil for driving, power or plastic making. The run up in prices is the result of market participants expecting oil to go higher because of a combination of factors: weaker dollar zone currencies; the risk of supply disruptions; AND increased demand.

But this what speculation is: the market participants are assuming some risk of downside price moves in exchange for some chance of upward price moves. (or vice-versa)

[Aeson]

Originally posted by Victor Galis
Except I'm not seeing how reducing production now lets them produce more later unless their fields are being rapidly depleted or they're producing the oil and hiding it. I could also see them doing maintence that would shut down production short term for a long term boost... but that's a good thing.

Thanks for answering your own question? Though you don't have to have a rapidly depleting field to "stockpile" by limiting how much you pump out. Reserves can be thought of as longer term "stockpiled" oil.

Also, you don't need to produce more later to profit more. Profit is the amount of $ you take in vs what goes out. Not necessarily the amount of oil you pump out of the ground. Speculators generally aren't pumping any oil, yet still can profit (or lose) based on rumors, market technicals, or actual news changing the price of oil. The big players can, and do, modify their output, thus changing the price of oil. I would suspect that they do so in order to increase the profitability of their business, since that's only natural.

[The Mad Monk]

What do you folks think of Pelosi's idea of releasing the strategic oil reserves?

[rmsharpe]

Originally posted by Imran Siddiqui
I'm sure no one else has to pay for the costs of air pollution caused by burning fossil fuels or anything.

Those are the hazards of industrial society. The forest is still out there, if you'd like to live like Ted Kaczynski.

That's not even bringing in the different views on the duties of society on health care coverage.

That's why we have a Constitution with a defined set of government powers, enumerated by the people.

Still costs money. Still has to come from tax revenues for subsidies to make it affordable to actually build the damned things.

Why? Why couldn't a utility company just build one and charge consumers what it costs?

Which ones in positions of power?

George Bush, John McCain, Barack Obama, Nancy Pelosi, Harry Reid.

Or are they, trying to wean us off foriegn oil and dirty coal burning and onto alternative fuel?

Come on, you're smarter than that. The "foreign oil" thing is just a political game; oil is sold on the global market.

As for the coal, just how do you propose to efficiently power the U.S. economy?

And most Americans live in urban America (79% according to the last census). Similar to Canadians (77%). And while most Canadians live 100 miles of the US border, it still is a far distance from Vancouver to Prince Edward Island, and as you mentioned, its far, far colder in Canada so they consume more energy per capita than the US AND their economy is pretty decent and hardly crippled.

Oil and natural gas make up over half of Canada's energy consumption.

[rmsharpe]

Originally posted by The Mad Monk
What do you folks think of Pelosi's idea of releasing the strategic oil reserves?

She's fighting a forest fire with a squirt gun.

[Whoha]

Originally posted by The Mad Monk
What do you folks think of Pelosi's idea of releasing the strategic oil reserves?

This is a bad idea that I would not support.

[Zkribbler]

Originally posted by rmsharpe

She's fighting a forest fire with a squirt gun.

True. Plus, the purpose of the reserve is for use if our oil supply is cut off. What we are facing now is a long-term systemic problem. If we were to use it up, what then?

[Imran Siddiqui]

Originally posted by rmsharpe
Those are the hazards of industrial society. The forest is still out there, if you'd like to live like Ted Kaczynski.

So your basic answer is, who cares if they are killing other people, we're an industrial society! Tough?!

Society subsidizing industry is the solution? I didn't think you liked welfare.

I'm sure you'd like to apply to this all facets of business, so when you get very sick by drinking polluted water, don't complain or try to sue the company that was the cause or nothing.

That's why we have a Constitution with a defined set of government powers, enumerated by the people.

Steward Machine Company v. Davis and Helvering v. Davis (ie, the Social Security cases) seem to say that the government offering health care benefits is quite alright under the Constitution

Why? Why couldn't a utility company just build one and charge consumers what it costs?

Cause it costs too much money to be profitable? Especially in start up costs.

George Bush, John McCain, Barack Obama, Nancy Pelosi, Harry Reid.

I asked for someone who is a "global warming fanatic" who is "out there trying to destroy all of our fossil fuels" and you provided me with none.

Come on, you're smarter than that. The "foreign oil" thing is just a political game; oil is sold on the global market.

As for the coal, just how do you propose to efficiently power the U.S. economy?

And you'd have to foolish to believe that the global market isn't controlled by foreign countries. I mean there is a cartel out there, which doesn't include the US, that caused a massive recession in the 1970s.

And as for coal... were we not just talking about nuclear power? Gradual process, but eventually a good policy.

Oil and natural gas make up over half of Canada's energy consumption.

No **** sherlock and their higher taxes on those two sources don't have a crippling effect on their economies, which was my entire point.

[notyoueither]

Originally posted by Oerdin
My comprehensive solution?

1 - Get rid of speculators by returning to the pre-2001 anti-speculation law.

You'll just move the markets for speculation outside of the US.

[Victor Galis]

Originally posted by Vanguard
Commodities do not double in price due to gradually increasing demand.

Reality seems to disagree with you. Oil is hardly the only commodity this has been happening two.

She's fighting a forest fire with a squirt gun.

They all are. The public wants the government to magically make gas cheap and none of them has the guts to say: It can't be done. So instead they're arguing over which squirt gun to use on the forest fire.

True. Plus, the purpose of the reserve is for use if our oil supply is cut off. What we are facing now is a long-term systemic problem. If we were to use it up, what then?

Then we wouldn't have it when supplies are disturpted

[rmsharpe]

Originally posted by Imran Siddiqui


So your basic answer is, who cares if they are killing other people, we're an industrial society! Tough?!

Can you find one person whose cause of death is listed as "air pollution?" I've been in New York, Chicago, Los Angeles, and I never had a problem breathing, even during rush hour.

Society subsidizing industry is the solution? I didn't think you liked welfare.

We're not subsidizing anything, we're voluntarily buying or using a company's services or products.

I'm sure you'd like to apply to this all facets of business, so when you get very sick by drinking polluted water, don't complain or try to sue the company that was the cause or nothing.

Since the company dumped their waste into a water supply that belonged to somebody else, why shouldn't you be allowed to sue for dumping on someone else's property? I'm against excessive government regulation, not the right to seek redress.

Steward Machine Company v. Davis and Helvering v. Davis (ie, the Social Security cases) seem to say that the government offering health care benefits is quite alright under the Constitution

You must be under the mistaken impression that I agree with what the Supreme Court does.

Cause it costs too much money to be profitable? Especially in start up costs.

Exactly.

I asked for someone who is a "global warming fanatic" who is "out there trying to destroy all of our fossil fuels" and you provided me with none.

Committing economic suicide by trying to mandate alternative energy isn't enough? Cheap energy is the foundation of our economy.

And you'd have to foolish to believe that the global market isn't controlled by foreign countries. I mean there is a cartel out there, which doesn't include the US, that caused a massive recession in the 1970s.

I'm not at all in denial about there being a cartel, I'm saying that the protectionist measures attempted by some in Congress are at the very least laughable, if not scary.

And as for coal... were we not just talking about nuclear power? Gradual process, but eventually a good policy.

I agree, if it can be made cost-effective enough for it to be built on a massive scale.

No **** sherlock and their higher taxes on those two sources don't have a crippling effect on their economies, which was my entire point.

I'm sorry, but I don't know enough about energy policy in Canada or Australia to tell you that they've got some sort of punishing tax rate on cheap energy. Do you have that information?

[Jon Miller]

Originally posted by rmsharpe

Can you find one person whose cause of death is listed as "air pollution?" I've been in New York, Chicago, Los Angeles, and I never had a problem breathing, even during rush hour.

It was a lot worse before controls were enforced. Or go to China now...

And yes, people did die from air pollution (Basically killing their lungs).

JM