T Nation

Oil Below $108

LONDON (AFP) - Oil prices fell on Wednesday after the US government decided to release crude stocks from its strategic reserve after Hurricane Gustav had brought a halt to energy production in the Gulf of Mexico.

New York’s main contract, light sweet crude for delivery in October, shed two dollars to 107.71 dollars.

Brent North Sea crude for October fell 1.91 dollars to 106.43 dollars.

http://afp.google.com/article/ALeqM5j1iYGEJPvFZP28SjhOn23E2MUrnQ

Just don’t forget this previous post:

[quote]hedo wrote:
The market is betting on increased supplies coming online…mostly from the US.

The prices just seen were a bubble and it burst. Oil will stabilize at about $80 a barrel after the election.

lixy wrote:
If it ever reaches $80, ever again, I will publicly eat my underwear.

The third world car-shopping frenzy has just started.[/quote]

Less then $38 to go, and lixy will be eating underwear.

(Next update at below $100)

Summer driving season is over. Oil stocks will increase further. Lixy eating underwear soon.

Analysts yesterday were predicting a reduction in oil demand from countries like China and India because of the global economic slowdown…

So the question is: Boxers or briefs, lixy?

I have been watching the decline in oil prices for the past month, yet gas is still around 4 bucks a gallon. What gives?

[quote]skaz05 wrote:
I have been watching the decline in oil prices for the past month, yet gas is still around 4 bucks a gallon. What gives?[/quote]

Gas has dropped about 25% from it’s high thus far… maybe more

[quote]skaz05 wrote:
I have been watching the decline in oil prices for the past month, yet gas is still around 4 bucks a gallon. What gives?[/quote]

As strange as this sounds, the price of oil and gas are not fully connected, and can rise and fall independently of each other.

As an example, housing materials have climbed, but houses have not. What this means is that builders are going to build less houses, until the market changes.

The same with oil and gas. We have a limited source of refineries here in America. (I believe they have finally approved the building of the first new one in 30 years.) That creates a bottleneck, and regardless of how much oil there is, we cannot make any more gas. (We import that too.)

But eventually it does have an effect on gas prices. Recently the oil price drop had slowed, but is showing signs that it is still dropping. Interestingly gas had actually reversed direction and was headed up, unless I am misreading the chart.

Also it takes 6 weeks for that oil to reach the refineries, so there is a price lag, at least on the down side that is.

On top of eating my underwear, I’ll quit posting on this forum for a year it ever reaches $80 or below.

You know what to do to help it happen.

[quote]lixy wrote:
On top of eating my underwear, I’ll quit posting on this forum for a year it ever reaches $80 or below.

You know what to do to help it happen.[/quote]

No. Please tell us.

Sadly, artificial interference in supply like this is bad in the long run. Its like playing your last Ace, and now your opponents know you’re out of Aces.

The real best way to lower prices would be to open ANWAR, and develop the oil shale resources in North Dakota.

Duh, stop buying barrels of oil.

[quote]Headhunter wrote:
Sadly, artificial interference in supply like this is bad in the long run. Its like playing your last Ace, and now your opponents know you’re out of Aces.

The real best way to lower prices would be to open ANWAR, and develop the oil shale resources in North Dakota.[/quote]

Opening ANWAR and the oil shale would definitely have an impact on oil prices here domestically. If we really want to take some of the longer term speculation out of the marketplace, we could pass legislation to open ANWAR (we wouldn’t even have to start drilling) and simultaneously pass legislation to commit to some real alternative energy sources (such as the Pickens Plan).

The combo of these two actions, without even ever coming to fruition, would drive quite a bit of speculative activity out of the market.

“Speculative activity” is not the problem, though there are a lot of politicians saying so right now and a lot of media people saying it.

The question is, What will oil be worth in the future at particular times?

This is fundamentally an arena of guessing and a matter of opinion, but it’s not only completely legitimate but it is helpful to the market that trading occurs in these futures.

For example, suppose you run an airline. How does it make sense for your company to be absolutely wide open to the possibility – it can’t be ruled out anyway – that say in December 2009 jet fuel prices might be triple what they are now?

That could destroy your company. While your firm can absorb some of the risk of increased price itself, it may be foolish to absorb all the risk – that is to say, to have to buy all the fuel you need at then-market prices rather than having at least some of it at an already-agreed price.

Buying some amount of futures for Dec 2009 at say 110% of the current price may be a smart move. True, prices may drop and then you wasted money, but at least your company isn’t wrecked, whereas if prices go through the roof you’ll sure be glad that you paid only 110% the current price.

Now, the value of the futures depends and should depend on the collective opinion of all the generally-pretty-smart-and-informed people that are trading in this market.

It is true that if it’s believed that prices will be high in the future, this also tends to drive current prices higher, because why pump every barrel you can now if some of those barrels could be pumped next year instead for a much greater (if it’s believed to be much greater) price?

An idea that there should be no futures market in oil is unrealistic. And the claim made by others that the amount of trading is the problem, that more trading causes higher prices, is also wrong.

Futures go higher because it actually looks to most people like the supply/demand situation will result in higher market price in the future. They go lower when most people start thinking that the futures market overestimated.

Very simply, the increasing demand from China and India, which previously had never been such a big factor, combined with Democrat control and Democrat absolute obstinance against drilling caused the market to believe oil prices would be way, way higher in the near and longer-term future.

They probably overestimated and probably, as it always does with time, the market is correcting.

Futures trading results in smoothing of price (less extreme momentary variation) and this is good for everyone. When the traders make large profits, the profits are not out of the pockets of consumers: they’re out of the pockets of traders that bet badly.

But I guess blaming traders makes a good scapegoat for politicians?

[quote]Bill Roberts wrote:
But I guess blaming traders makes a good scapegoat for politicians?[/quote]

I don’t blame traders in general. I blame one: T. Boone Pickens.

I Don’t buy into his new program for a minute. He single-handedly threw a monkey wrench in the Texas Panhandle’s wind farm plans. But on TV, you hear him talking about getting away from oil.

He’s shorting oil like there’s no tomorrow, but only after pushing and shoving the Public Utilities Commission to lower the planned total megawatts that can be produced in the Panhandle, which, by at least three independent accounts, has the best place on earth to build windfarms.

Shell Energy alone had announced plans to have a 3000 mega watt farm built, and another had planned to put in a 2100 mega watt farm. Now, thanks to T.Boone, the entire Panhandle is only allowed 3191 megawatts to be produced.

Why? He’s planning on his own windfarm, and building his own transmission line.

As soon as he announced this, he started vilifying oil.

You are correct in saying that the futures markets are good for the economy, and I don’t have any ill feelings toward the market at all. I have a problem when one guy can effect prices to such an extent.

Basically, he’s been long in oil,and made a tidy profit. Now he’s shorting it and trying to double dip by talking up alternative energy.

He’s screwed up enough stuff in Texas that I don’t trust that beady-eyed little SOB any futher than I could throw him.

[quote]Bill Roberts wrote:
“Speculative activity” is not the problem, though there are a lot of politicians saying so right now and a lot of media people saying it.

The question is, What will oil be worth in the future at particular times?

This is fundamentally an arena of guessing and a matter of opinion, but it’s not only completely legitimate but it is helpful to the market that trading occurs in these futures.

For example, suppose you run an airline. How does it make sense for your company to be absolutely wide open to the possibility – it can’t be ruled out anyway – that say in December 2009 jet fuel prices might be triple what they are now?

That could destroy your company. While your firm can absorb some of the risk of increased price itself, it may be foolish to absorb all the risk – that is to say, to have to buy all the fuel you need at then-market prices rather than having at least some of it at an already-agreed price.

Buying some amount of futures for Dec 2009 at say 110% of the current price may be a smart move. True, prices may drop and then you wasted money, but at least your company isn’t wrecked, whereas if prices go through the roof you’ll sure be glad that you paid only 110% the current price.

Now, the value of the futures depends and should depend on the collective opinion of all the generally-pretty-smart-and-informed people that are trading in this market.

It is true that if it’s believed that prices will be high in the future, this also tends to drive current prices higher, because why pump every barrel you can now if some of those barrels could be pumped next year instead for a much greater (if it’s believed to be much greater) price?

An idea that there should be no futures market in oil is unrealistic. And the claim made by others that the amount of trading is the problem, that more trading causes higher prices, is also wrong.

Futures go higher because it actually looks to most people like the supply/demand situation will result in higher market price in the future. They go lower when most people start thinking that the futures market overestimated.

Very simply, the increasing demand from China and India, which previously had never been such a big factor, combined with Democrat control and Democrat absolute obstinance against drilling caused the market to believe oil prices would be way, way higher in the near and longer-term future.

They probably overestimated and probably, as it always does with time, the market is correcting.

Futures trading results in smoothing of price (less extreme momentary variation) and this is good for everyone. When the traders make large profits, the profits are not out of the pockets of consumers: they’re out of the pockets of traders that bet badly.

But I guess blaming traders makes a good scapegoat for politicians?[/quote]

Overall good post. Don’t mistake me, I am not blaming traders or capital participants for anything. I am simply stating a fact that there is speculative activity in the market place. We simply cannot ignore anymore the existence of speculation in leveraged markets and influence that it does have.

The experience in the 90’s with the bond vigilantes taught us that much. I absolutely agree with you that politicians, on both sides, look for easy scapegoats in order to tell the story that they want heard.

However, in most cases, the influence that speculation brings to our fiscal policy can often be a benefit (ie bond vigilantes leading to a balanced budget, speculation in energy marketplace leading an renewed drive for energy independence and innovation, currency speculation forcing governments to actually deal with the problems that exist on their balance sheets, etc…)

Your analysis is spot on with regards to the airline scenario, as you probably know that is one way that Southwest Airlines has been able to keep themselves more financially viable when so many of their competitors have struggled.

Remember also that when we talk about futures contracts there are more reasons than just supply/demand why contracts fluctuate and vary over time. When we are specifically talking about oil, the cost of carry and future expectations on that cost certainly also lead to varying amounts of price discovery.

[quote]hedo wrote:
Summer driving season is over. Oil stocks will increase further. Lixy eating underwear soon.[/quote]

This is the same lixy that was making all those great predictions about the now-defunct People’s Party in Pakistan.

[quote]rainjack wrote:
Bill Roberts wrote:
But I guess blaming traders makes a good scapegoat for politicians?

I don’t blame traders in general. I blame one: T. Boone Pickens.

I Don’t buy into his new program for a minute. He single-handedly threw a monkey wrench in the Texas Panhandle’s wind farm plans. But on TV, you hear him talking about getting away from oil.

He’s shorting oil like there’s no tomorrow, but only after pushing and shoving the Public Utilities Commission to lower the planned total megawatts that can be produced in the Panhandle, which, by at least three independent accounts, has the best place on earth to build windfarms.

Shell Energy alone had announced plans to have a 3000 mega watt farm built, and another had planned to put in a 2100 mega watt farm. Now, thanks to T.Boone, the entire Panhandle is only allowed 3191 megawatts to be produced.

Why? He’s planning on his own windfarm, and building his own transmission line.

As soon as he announced this, he started vilifying oil.

You are correct in saying that the futures markets are good for the economy, and I don’t have any ill feelings toward the market at all. I have a problem when one guy can effect prices to such an extent.

Basically, he’s been long in oil,and made a tidy profit. Now he’s shorting it and trying to double dip by talking up alternative energy.

He’s screwed up enough stuff in Texas that I don’t trust that beady-eyed little SOB any futher than I could throw him.

[/quote]

Don’t forgot about his water-rights holdings that he has in Texas also. Any guess on a timeframe as to when he will announce some new plan around water?

[quote]lixy wrote:
On top of eating my underwear, I’ll quit posting on this forum for a year it ever reaches $80 or below.

You know what to do to help it happen.[/quote]

Wipe Israel off the map?

[quote]ajcook99 wrote:
Don’t forgot about his water-rights holdings that he has in Texas also. Any guess on a timeframe as to when he will announce some new plan around water?
[/quote]

He’ll hold on to that until it is needed. He tried to lease up my uncle’s water. He didn’t get very far.

My guess is that he’ll wind up holding the Texas Panhandle hostage with the water rights - just like in the old west.

[quote]The Mage wrote:
Less then $38 to go, [/quote]

First of all, it should be “fewer” not “less”.

Secondly, “then” is used as a time marker or with a sequence of events. The correct word is “than” in a comparative context.

Last but not least, 80 subtracted from 108 is equal to 28. Not 38 as you seem to think.

[quote]lixy wrote:
The Mage wrote:
Less then $38 to go,

First of all, it should be “fewer” not “less”.

Secondly, “then” is used as a time marker or with a sequence of events. The correct word is “than” in a comparative context.

Last but not least, 80 subtracted from 108 is equal to 28. Not 38 as you seem to think.[/quote]

The Mage is the result of Nebraska’s public education program.

Oil prices here in Southern California are still high, but I believe they will come down some more. It will NOT be enough for an underwear-eating party at Lixy’s though.