Speculation on Oil Price Fall

[Brent]

Did people complain, surely, was there any reason to...not really.

I think everyone was complaining, some more than others. But in America there was really a sea change in thinking, at least for a little while. That's what I'm trying to get at -- was there a big change in thinking among Europeans, or was it business as usual?

Many of my friends and colleagues made major or minor lifestyle shifts in the wake of higher fuel prices. One sold her BMW 6 series and replaced it with a 3 series (not cost effective, but whatever). Another friend put his house up for sale so he could move closer to work (then the recession hit, and it still hasn't sold). One bought a bicycle to use for commuting at least one day per week. Some friends spent their summer vacations closer to home. In general, I felt there was a sense of inevitability, that gasoline prices were high for good, and it was time to rethink our lifestyles.

Did you see these kinds of changes, too?

 

[Cobos]

I'm sorry my post didn't answer that clearly. No I do not beleive we saw these changes. Keep in mind about half of the prices quoted above are taxes and fees, so there was a huge outcry for lowering the taxes for gasoline. And due to bad timing a previously agreed on (every party in parliament except the right-wing party) increase in taxes of $0.02 came at the same time as gas prices was at it highest.
As mentioned above gasoline expenses for a normal budget might have climbed from 2% to maybe 3% of expenses. That means you might cut down a little on the shorter trips but nothing noticable on national scale. I sure didn't change my behaviour at all, and I've got a teachers salary. This might have helped our right-wing party which has been very anti-taxes. They've promised to lower pigouvian taxes for both car purchases and gasoline prices.

Another thing to keep in mind is Norway is very special in this regard, as a major oil exporter we were making money hand over fist with crude prices that high. There's a reason we talk about mainland-GNP to state specifically it's excluding our offshore income.

The increase in gasoline prices also came after a historically good year for wage increases, so my initial sentiment that this was much ado about nothing has some merit.

I beleive in most of the rest of Europe gasoline is taxed a lot more than in the states so a a doubling of the crude prices meant relatively the price increases were a lot lower in Europe compared to the US. And when the actual cost was a few less beers per month, most people will grumble but not really change their lifestyle.

Cobos
Cobos

 

[Kevin Harney]

Yeah but Brent they are currently paying about $1.65 per LITRE and there are about 4 litres to gallon if I am not mistaken ..... So they are already paying more than us even at the deflated prices...

 

[vfx]

Oil's Puzzling Spring Surge

"Crude oil prices are up 60 percent on the year. Supplies are at a 10-year high, and demand is at a 10-year low. You do the math. Why should prices be over $70?"

"It's almost as if these current prices are in an alternative universe," hedge-fund manager Mike Masters, a fixture at congressional hearings on commodities oversight, said in an interview with the trade publication Mastering Derivatives. "You've got the speculative price of oil, and you've got what the actual price of oil would be."

Many regulators, oil analysts and oil executives say that the lurches in price this year -- even more than last year's -- must be attributable primarily to one factor:

Speculators.

 

[Tdave]

I could make a counter argument to that, vfx...

The prices last summer near $150 were anomalous to normal supply/demand. The prices at the depth after the collapse were similarly anomalous to supply/demand of the commodity due to the collapse of the financial sector and forced deleveraging. And prices now have returned to a more natural level consistent with supply/demand. In other words, this is the level we should be at, without the overshooting to the upside and the downside.

 

[Serge]

The speculators argument hold some weight

As far as I understand speculators represent quite a large percentage of trades in oil markets still. Oil must be seen a good investment in contrast to unstable financial markets.

 

[Tdave]

As far as I understand speculators represent quite a large percentage of trades in oil markets still. Oil must be seen a good investment in contrast to unstable financial markets.

This is true. But the thing about taking a speculative position in a commodity derivative market is that you must at some point either take delivery, or close/unwind your position. All those derivative trading instruments expire within months. So within months the trade must be closed. A particular trade can get crowded with lots of players making the same bet, as it did to the upside last summer. But the eventual unwinding of those positions will undo that short term speculative bubble. It must, every time, within months.

My point is that the speculative affect to the market will always be short term in nature, and will usually be balanced by swings in the opposite direction to the mean. Speculators add liquidity, which is good, but also can add volatility, which in commodity markets is bad for those who actually use the commodity.

The players in the market that actually deliver the product or take delivery can hedge against volatility by taking derivative positions equal to their commodity usage. That's what players like Southwest Airlines do quite well in the oil markets.

 

[Serge]

This is true. But the thing about taking a speculative position in a commodity derivative market is that you must at some point either take delivery, or close/unwind your position. All those derivative trading instruments expire within months. So within months the trade must be closed.

As far as I understand, this is how "normal" commodity markets are supposed to work, where players are "big" and speculators are "small." Speculators are allowed in to add liquidity, to grease the massive wheels of supply & demand driven by players. Therefore their effect on the overall market is limited and any attempt to game it is of short-term nature.

Enter financial innovation and deregulation. An article I read last summer trying to understand the oil mega-bubble describes a crucial change in market:

Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant

which brings you the third option:

There is a third thing one can do with oil, and that is continually roll over futures without ever taking delivery.

Like in a casino, if you have the reserves, you stay in the game and keep rolling until a solid hand comes along; then you cash out.

 

[vfx]

Like in a casino, if you have the reserves, you stay in the game and keep rolling until a solid hand comes along; then you cash out.

Gambling ib stupid (unless you own the house).

 

[BBHighway]

The drop in oil prices may end soon.

Warning: Oil supplies are running out fast - Science, News - The Independent

The IED is usually very conservative about peak oil, up until recently they have optimistically claimed that it would only happen in the 2030 to 2050 time frame.

 

[vfx]

Now, when the world needs more oil than ever, it's changing faster than we can keep up with - By Daniel Yergin | Foreign Policy

Oil's very future is now being seriously questioned, debated, and challenged. The author of an acclaimed history explains why, just as we need more oil than ever, it is changing faster than we can keep up with.

 

[vfx]

So the drop of oil price will send OPEC asking for Federal funds since it hurts them...

Stock Rally of 503 Percent Puts OPEC to Shame: William Pesek - Bloomberg.com

here’s only one thing to say about OPEC’s goal to be compensated for falling oil prices: Ha ha ha!

Folks, you must be kidding me. The stuff has made you rich. Government coffers are flush with the spoils of pumping “black gold” out of the ground and hastening global warming. Now you want us to cushion the blow as we combat the phenomenon?

All over the globe, scientists are working on the next generation of fuel alternatives. By engineering high prices, OPEC is merely accelerating the process. Oil at $100 a barrel will fuel the very innovation the cartel would sooner avoid.

 

[Serge]

Peak Oil Markets: Price dynamics at the end of the oil age

I will echo a Deutche Bank study titled "The Peak Oil Market: Price dynamics at the end of the oil age" mentioned by Alfred in http://www.teslamotorsclub.com/elec...lectric-car.html?highlight=Deutsche#post37210 thread. It's a long read, but I highly recommend it to anyone interested in the topic, as research is quite thorough.

Fundamental: Efficiency will drive the long-term future of oil
Building on our February 2008 note “The 100mb/d peak oil market”, we have refined and deepened our global demand/supply model, and extended it out to 2030 to capture the game-changing emergence of a powerful disruptive technology, the electric car. Our gasoline model focuses on the major (200% +) efficiency gains flowing from the new era in transportation. Unburdened by the conflicted forecasting agendas of government agencies, oil companies, or auto makers, we forecast a game change. US and then global oil demand will fall dramatically once the high efficiency fleet hits critical mass; competing structurally cheaper natural gas will exacerbate the pace of demand decline. In our view global oil demand peaks in 2016, with oil prices, before a long, tandem, decline