Was I Wrong? Is Oil Trading Primarily a Speculative Market
How else to explain a 20% drop in prices since The Destruction of the Gulf of Mexico?
Oil fell below $70 Monday, reaching a low of $69.27 before rebounding slightly…The turnaround has been sudden — oil hit an 18-month high of $87.15 a barrel during trading on May 3.
The plunge in oil extended to the New York Stock Exchange, where shares of major energy companies were lower.
Is oil the derivatives of hard commodities: the place where liquidity is based on speculation, not fundamentals?
partially, but you might want to measure the price of oil in terms of a currency basket, not in terms of dollars.
I noticed the drop in prices also.
Under the assumption (if you believe it) that oil is the scarce commodity, then the drop in prices a result of partial economic collapse, unfortunately. My story here is simple. The stimulus took effect, oil imports jumped dramatically, way more dramatic then in the run up. The economy freaked and said, this stimulus thing isn’t working according to plan.
I look at this:
DOE measured oil imports. That measure shot up like a rocket, with a higher beta than in the run up to the crash. A very stong signal that US government stimulation comes with terrible energy efficiency, and the US economy cannot support that inefficiency. The cost of a 5% gain in GDP was a 10% jump on imports. The private sector had twice that efficiency, and still could not justify such high imports.
I would guess the recent changes in oil prices are more indicative of world economic growth expectations. Gulf production represents ~5% of global production, but a much larger percent of global demand could be destroyed by a worsening Euro crisis.
I’d say that supports the notion that the oil went into storage.
Anything treated as a financial rather than a real asset is subject to speculation, manipulation, bubble and collapse. Even real estate, as we’ve recently witnessed.
If you don’t think crude is a finacial asset, then stop to consider that recently the biggest oil company, in terms of actual material owned, in North America was Morgan Stanley. I think they are still paying hundreds of thousands of dollars to rent tankers for storage.
Cheers, I guess.
A day trader’s best friend.
The Gulf oil accident should have little or no impact on the supply or price of oil in the short run –it does not impact any of the supply currently entering the final market.
In the long run it should raise the price of oil by making drilling and exploration more expensive and possibly removing some potential supplies from the market for environmental reasons.
In the short run oil prices are falling because of the deflationary impact of the European fiscal crisis. This is forcing restrictive economic policies on much of Europe that will have negative secondary repercussions around the world, including China. This is showing up in lower commodity prices almost across the board– gold is the major exception. Oil prices are not the only commodity price to take it on the chin over the past couple of weeks. Moreover, the dollar has strengthened and that acts much like higher rates on the economy. The surprise is that this is happening in the seasonally strong spring demand season for oil and it is not yet showing up at the pump because of this seasonal pattern
The significant correction in the stock market is in line with the drop in commodity prices and reflects the increased uncertainty and risks investors now see despite lower interest rates– the US 10 year t-bond yield is back below 3.5 — and continued strong growth in US domestic profits.
Oil used to cost $15 not that long ago. We just had a $15 price drop in 2 weeks.
I was wondering who GS was selling it all to. Now I know. MS.
But don’t forget China stockpiling, and pension funds are big buyers of commodity ETFs too.
I agree with Jazz.
Anything traded on the markets is just another poker chip. Investment isn’t in it.
I don’t know if petroleum pricing is speculation driven exactly, but it’s clearly pretty volatile. For several days now I have been encountering reports fhat China has hit its internal economic brakes hard. If true, a combination of lower anticipated growth in China and the European crisis might plausibly result in a 10% drop in petroleum prices. It’s not like anticipated growth in the US and Canada is all that robust either. And as Spencer points out, oil is priced in dollars and dollars are strong this week.
There is a tremendous amount of speculative activity in WTI, but most of the big, trending moves are based on fundamentals or perceived fundamentals. The size and depth required to drive WTI or Brent against the market is beyond any single player any more; if there are speculative moves (manipulations and squeezes) they are done in partnerships (tacit or fortuitous).
Oil traders have their pulse on the world economy and are able to judge its health far better than sectorial stock analysts on Wall Street. I would guess that most of this move is based on oil traders seeing that the economy sucks despite the propaganda spewed out by Washington, Wall Street and CNBC.
More on China — The Shanghi Composite Index dropped 5% yesterday. So, maybe less petroleum going there for the next year or two. http://www.chinadaily.com.cn/china/2010-05/18/content_9860082.htm
Oil supplies are up: http://www.eia.doe.gov/oog/info/twip/twip.asp
I would say you are correct. Gasoline demand (increasing) is still down and Supply substantial,
why should the spill have anything to do with that price?
europe started unraveling the same week as the oil started spewing…the dollar is up 14% or more since then…oil is priced in dollars, right?
I’ve figured it’s been mostly speculative for several years now and the price reflects the credit markets more than it does IEA reports or other supply or demand issues (except according to headline writers). I suspect it’s the same with gold too, in spite of this recent price spike – a short term fear trade but I’m certainly not long term bullish.
Commodities in general, particularly energy and precious metals have been marketed in recent years as a ‘hedge’ against inflation, uncertainty, etc. – as a safe haven investment rather than what they truly are – very risky and volatile.
At last, a comment that recognizes there are big changes afoot outside of Greece. China has been tightening financial conditions. Oil’s recent peak was April 6. The Hang Seng’s recent peak was April 9. The S&P’s recent peak was April 23. There was a local peak in Greek 2-year yields on April 28. If propinquity tells us anything, it is that China matters to oil, Greece to stocks. That is surely not always the case (Greece?), and there is very likely some influence from both China and Greece on both stocks and oil, but we want to get our correlations right before moving on to causation.
If you look at the price of oil in euros, it is clear that oil price fluctuations reflect more than exchange rate fluctuations lately – and most times.
It still can’t depart from fundamentals forever, but prices seem to get way out of whack for 3-6 months at a time. Remember the last run to $140. I read back then 80% of the contracts were purchased by non end users.
The futures markets are not being used for their origonal intended economic use.
the thread is about the time since the spill, which is all i was refering to…
Commodity pricing isn’t a simple thing. Underlying all the speculation is real end-user value. The speculative peaks and valleys sit on top. The deviation from fundamentals can be enormous.
Crude was under $20 before we invaded Iraq. Assuming a valid $20 price in 2002,
and if fundamentals justified a 10% per year increase – which seems pretty extravagant – crude should be about $43 per barrel.
If demand in China, and world-wide goes down, the price could simply collapse.
I’ve been seeing tulip bulbs in oil derricks since 2004.