WASHINGTON — A glut of ethanol in the gasoline supply is threatening to push up prices at the pump and may have exacerbated the growing cost gap between regular gasoline and premium, some oil experts say.
Workers drilling for oil outside Watford City, N.D. New production techniques have created a glut of crude oil in the United States. Andrew Burton/Getty Images
Conflict in Oil Industry, Awash in Crude
By CLIFFORD KRAUSS FEB. 12, 2014
HOUSTON — T. Boone Pickens has personified the nation’s oil industry for more than a generation. So when he made an offhand comment at a conference here a few weeks ago expressing reservations about lifting the nation’s ban on exports of crude oil, he startled some of his old allies in the business.
Scott Sheffield, chief executive of Pioneer Natural Resources and one of the top oil executives in the state, picked up the phone to have a chat. “We had lunch and he made sense,” said Mr. Pickens, who has since revised his position.
Chalk one up for the oil producers, who have begun lobbying the Obama administration, Congress and the public to let them export the bounty of crude oil flowing out of new shale fields across the country.
Opposing them are their erstwhile cousins, the independent refiners, who insist that they need abundant, economical domestic supplies of oil so they can compete with foreign refiners.
It is a rare clash in a deeply guarded industry that involves arguments over national security, pricing at the pump and, after all is said and done, who will get a bigger share of earnings from the current drilling rush.
“What we have here is a food fight for the profits that will come either from exports of crude oil or exports of refined products,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis, who testified before Congress recently in favor of lifting the ban. “It’s like an argument inside a family business but one that could result in huge market distortions that can either hurt the consumer or our national security.”
Producers like Mr. Sheffield warn that a mounting glut of certain grades of oil in some regions of the country will eventually force a halt to unprofitable drilling if exports are not allowed.
“Nobody wants the collapse of the oil industry,” Mr. Sheffield said in an interview. “You would be importing crude oil from the Middle East all over again.”
On the other side of the debate are some of the nation’s biggest refiners, who argue against unlimited exports of crude oil even as they export increasing amounts of refined products like diesel and gasoline. To their way of thinking, the oil producers are merely trying to increase their profits at the expense of American consumers.
“They are seeking the highest price available,” Bill Day, a vice president at the Valero Energy Corporation, a large independent refiner, said of the producers. “If anything, unlimited exports would raise the price of American crude to the international level, which is why the producers want this step to begin with.”
The debate began in earnest two months ago when Energy Secretary Ernest Moniz suggested at a New York energy conference that it might be time for the country to reconsider the export ban that was instituted in the 1970s, when OPEC oil embargoes threatened the American economy. Congress at the time made oil exports illegal except for some shipments to Canada. The ban on exports of Alaskan North Slope crude was lifted in 1996.
The topic has renewed interest thanks to the oil industry’s reversal of fortunes in recent years. Only seven years ago the country’s domestic oil production appeared to be in a downward spiral. But with the advent of new extraction techniques, entire new fields were opened, replacing oil imports from unfriendly or unruly places like Venezuela and Nigeria.
Suddenly parts of the Midwest and Gulf of Mexico regions are overflowing with superior grades of crude, leading to a slump in prices and a gap of as much as $10 between American oil benchmark prices and the dominant world Brent price.
Even under current restrictions, crude exports are growing quickly. Shipments to Canada have already roughly tripled since 2012 to around 200,000 barrels a day. Some analysts say they think that figure will double by the end of the year.
While the entire oil industry has profited from all the domestic production, which has increased by about 60 percent to eight million barrels a day since 2005, refiners have particularly benefited. American refiners became darlings of Wall Street by buying cheaper domestic crude and now export 3.4 million barrels a day of gasoline, diesel and other refined products, mostly to Latin America and Europe.
Not surprisingly, both the producers and the refiners say they are on the side of consumers and national security, and each side has academic and consultancy reports to back up its position.
The producers argue that if they could freely export, they would increase world oil supplies, forcing down the international Brent benchmark crude price, which in turn would reduce the price of gasoline at the pump. “The American consumer is held captive by the restrained market,” said Jack Ekstrom, a vice president at the Whiting Petroleum Corporation, a major producer in the North Dakota Bakken shale field. “When you have additional supplies coming on to market, the price naturally comes down.”
Executives at the refineries, which struggled for decades, counter that adding another million barrels of United States oil of daily supply to a global market of 90 million barrels a day will make little difference. Instead, they say, domestic crude prices will climb higher and with them gasoline prices.
“The export ban works,” Graeme Burnett, chairman of Monroe Energy, which operates Delta Air Lines’ refinery in Trainer, Pa., told a Senate Energy Committee hearing last month. “We still have a long way to go to protect against oil market volatility and achieve true energy independence.”
Refinery executives concede that they cannot argue against free trade when they are exporting products themselves. Michael C. Jennings, chief executive of the HollyFrontier Corporation, said in an interview that he could support ending the oil export ban as long as other regulations that he said penalize the refiners, including federal mandates for the refining of expensive biofuels, were also reformed.
Such sweeping energy reforms are not likely to be enacted by Congress soon. But in their talks with Commerce Department officials and members of Congress, refiners and producers appear to be closing in on some short-term compromises.
Some executives have suggested that Commerce Department officials could approve swaps of lighter American crudes to Mexico for their heavier sour crudes without violating current oil export regulations. That would give the producers another market and give refiners more oil to process.
There appears to be growing support for recharacterizing condensates, the hydrocarbon liquids used for petrochemical production, from crude to natural gas liquids, so they might be exported under current regulations. That would ease gluts in Rocky Mountain and South Texas fields where drilling has already slowed.
And perhaps more oil could be sent to countries with free trade agreements with the United States.
Such compromises, some executives say, could look something like the arrangements for export of liquefied natural gas from the United States. While gas producers supported exports and some chemical companies opposed them, the Obama administration responded by approving export terminals slowly to gauge the impact on domestic energy prices in the future.
“The middle ground could probably be accomplished without any additional legislation,” said Stephen H. Brown, a vice president for federal government affairs at the Tesoro Corporation, a major Texas refiner, “and I think that is what this administration is probably hoping for.”
Such actions by the Commerce Department, Mr. Sheffield said, could be a “relief valve that would push off the problem for another two years.”
But after that, he and other executives said, the country will probably again face a glut of high-quality crudes if current production trends continue.
Obama has the perfect plan to raise gasoline prices for Americans. His new refining standards would act to squeeze even more sulfur out of our gasoline, after the industry has just completed a major overhaul to do so. The Obama administration admits gasoline prices will go up as a result of the new regulation, but they estimate it will only be by one or two cents per gallon. Does anyone believe an Obama cost estimate or economic forecast at this point? The industry says the regulation will raise prices by approximately 10 cents per gallon. A rule of thumb is that for every penny gasoline prices rise, a billion dollars is sucked out of consumers’ pockets. And this is only one narrow regulation. Just imagine the economic enormous cost of all Obama’s planned regulations that haven’t made the newspaper headlines yet.
NOTICE: The steady rise in price after Glass-Stegall was repealed | 2000.
Drivers are ‘victims of speculators’ as petrol prices rise
Petrol prices are rising again following 10 weeks of falls, the AA has warned,
Was the petrol price rigged too?
Motorists may have been paying too much for their petrol because banks and other traders are likely to have tried to manipulate oil prices in the same way they rigged interest rates, an official report has warned.
Gas Price Experts: Wall Street ‘Casinos’ Raise Pain At The Pump
WASHINGTON — Americans are paying for $4-a-gallon gasoline because Wall Street “casinos” have blocked regulators from cracking down on rampant oil speculation, finance experts argued on Capitol Hill Wednesday.
In an effort to counter Republican claims that gas prices are high because the Obama administration does not allow enough drilling, House Democratic leaders staged a hearing featuring former Reagan and Clinton administration oil and trading analysts who blame the surge on speculation.
And the vast profits from that speculation do not go into developing more oil or creating jobs, the analysts argued.
“Your constituents should know that every time they break their heart by buying $4 and maybe soon $5 gasoline, that money isn’t going into production,” said University of Maryland professor Michael Greenberger, who served as director of the division of trading and markets for the Commodity Futures Trading Commission in the Clinton administration. “It’s going into homebuilding in the Hamptons and yacht building.”
And the big finance firms are working overtime to ensure that the speculative commodity keeps flowing, he said.
“They’ve got hundreds of millions of dollars that they are using in lobbying on the Hill” or the Commodity Futures Trading Commission, Greenberger told HuffPost after the session. “Now they are bringing all these lawsuits; they are stopping the action that has already been asked for by Congress to stop the speculation.”
He was referring to suits that seek to limit certain Dodd-Frank financial reforms that, among other things, grant the commission the power to crack down on excessive oil speculation.
Greenberger told theDemocratic Steering and Policy Committee that curtailing the speculation — some of which he said was necessary — would cost nothing and would not stop any markets from functioning.
“What are you stopping here? Are you stopping money from going into production? Are you stopping money from [reaching] people creating jobs?” Greenberger asked. “Unless you think casinos — which come to us with names like Goldman Sachs and Morgan Stanley — are job creators, you’re stopping betting. If we’re wrong about this — if everything we’re telling you is incorrect — what will you have done except close a couple of casinos?”
Rep. Xavier Becerra (D-Calif.) pressed Greenberger if there was contradictory evidence when it comes to figuring out whether high gas prices could be cured through increased drilling and domestic oil production.
Greenberger conceded that one or two experts in the country would hold that opinion but said the vast majority in his field believe that Wall Street sets the price of oil.
“Many would like you to believe that this is a supply-demand problem. It’s not,” Greenberger said. “It is excessive speculation, which is a fancy way of saying that gamblers wearing Wall Street suits have taken over and created investment vehicles designed to drive the price of oil up.”
He cited testimony by Goldman Sachs earlier this year asserting that speculation drives up the cost of a barrel of oil by as much as $23.39.
Gene Guildford, a former president of the Maine Oil Dealers Association and a Reagan administration Commerce Department official, estimated that speculation translates into roughly a dollar added to the price of each gallon of gasoline bought by the U.S. consumer. “Instead of spending four dollars, you should have been spending something closer to three dollars for your gallon of gasoline,” he said.
The extra cost to America’s drivers is staggering, Guildford said. “At 11 billion gallons a month that Americans consume, Americans today are paying $10 billion more a month for gasoline today than they did in December.”
Both men urged the committee to fully fund the Commodity Futures Trading Commission and propose legislation in the House aimed at cutting oil speculation to what is required to keep the markets liquid.
Otherwise, it’s just making millionaires richer and middle-class Americans poorer, they and Democrats argued.
Consider these unassailable facts. As a consequence of government largresse, oil speculators screw the people with galloping gas prices which results in food cost increases and everything else. The economic collapse of 2008 – present, resulted from the sale of toxic paper because DC allowed it to happen. Private Equity firms envelop businesses, cuts costs in various ways including layoffs, then force their hosts to take on debt to provide return on investment. Finally, hedge fund managers who make millions for investing in paper, pay an unfair tax rate.
Once again, speculators behind sharply rising oil and gasoline prices
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON — U.S. demand for oil and refined products — including gasoline — is down sharply from last year, so much that United States has actually become a net exporter of gasoline, unable to consume all that it makes.
Yet oil and gasoline prices are surging.
On Tuesday, oil rose past $106 a barrel and gasoline averaged $3.57 a gallon — thanks again in no small part to rampant financial speculation on top of fears of supply disruptions.
Analysis: More U.S. drilling didn’t lower gas prices
Oil plummets more than 8 percent as commodities battered
By Matthew Robinson
NEW YORK | Thu May 5, 2011 2:18pm EDT
…Selling pressure on oil and other commodities came on several fronts this week, with investors weighing factors from the death of Osama bin Laden to the impact of higher fuel and commodity costs on the economies of consumer nations to monetary policy in major economies.
“Crude oil is selling off sharply for two primary reasons: QE2 is coming to an end in June and without a QE3 behind it, it will take liquidity out of the market, hurting risky asset classes such as commodities,” said Chris Jarvis, senior analyst, Caprock Risk Management in New Hampshire.
“With Osama bin Laden dead, the market is adjusting the geopolitical risk premium down accordingly. Given this, speculative money is being taking off the table.”
Obama’s Oil Market Fraud Squad May Miss Wall Street Abuses
First Posted: 04/22/11 06:50 PM ET Updated: 04/23/11 02:17 AM ET
…Gas prices are approaching record levels set in 2008, when prices at the pump eclipsed $5 a gallon. While unrest in the Middle East is almost certainly playing a major role in boosting current prices, increased speculation in commodities markets is likely contributing to the near record prices. The number of speculative bets being placed on oil and gas now far exceeds that of the 2008 price swing, which many economists believe was driven by excess speculation. Moreover, on March 21, Goldman Sachs analyst David Greely advanced the argument that Wall Street speculation was helping drive up oil prices in a memo sent to the bank’s clients.
But, if speculative excess is contributing to current sky-high gas prices, such activity may not be illegal, in part because the Commodities Futures Trading Commission has not yet issued key regulations intended to rein in Wall Street gambling on food and energy prices. Congress ordered the agency to crack down on excessive speculation with last year’s financial reform bill, but the CFTC has been slow to implement new rules in the face of intense lobbying from Wall Street bankers.
Unlike the stock market and other capital markets, commodities markets are not designed to function as a forum for investment vehicles. Instead, commodity markets are supposed to allow farmers, manufacturers and other producers to hedge the risks of doing business. By taking out a futures contract, or similar bet in the derivatives markets, farmers can lock in a price for their crops, protecting themselves from price changes. Producers need someone to take the other side of their price bets, whether it be another producer or, as it more frequently is, a Wall Street trader.
Commodities markets work well when around 30 percent of the market is dedicated to speculation, According to Kelleher. But since the mid-2000s, the share of speculators in commodity market activity has increased to about 70 percent, Kelleher says, in part driven by new commodities “index funds,” which allow investors to bet on the price of several commodities at once.The size of those fundsexpanded from about $15 billion in 2003 to $200 billion in 2008 , and are currently valued at over $250 billion, according to Barclays Capital. The explosion in the over-the-counter derivatives market has also contributed significantly to oil price increases, according to Kelleher, by allowing investors to place huge bets on commodities without either regulatory oversight or market scrutiny.The derivatives market for commodities grew from about $674 billion in 2001 to $13.2 trillion by June 2008, according to the Bank for International Settlements.
Oil prices have soared in recent weeks based upon the volatility of the market in response to the chaos in Libya and uncertainty in the Middle East. Tunisia and Egypt are not players in the oil market while Saudi Arabia, the key player, has not experienced massive unrest. Facts, therefore, do not support the sudden rise in oil and the subsequent increase of diesel and gas prices which affects every aspect of the economy: your life. Below are facts relating to the Libyan oil industry.
PRODUCTION OPEC member Libya produces 1.6 million barrels of oil per day. It is the 17th-largest producer in the world, the third-largest producer in Africa and holds the continent’s largest crude oil reserves. At least some 100,000 barrels per day, around 6 percent of Libya’s production, have been shut in as a result of the unrest.
Libya is a net exporter of oil. Its domestic consumption is estimated at only around 270,000 barrels a day.
Over 85 percent of its crude exports go to Europe, while around 13 percent goes east of the Suez Canal to Asia. Around 32 percent of Libyan oil goes to Italy, 14 percent to Germany, 10 percent to China and France and 5 percent to the United States.
Global demand for oil is a factor in the high price along with the http://online.wsj.com/article/BT-CO-20110408-710638.html weak dollar.
Oil Climbs Above $112 on Libyan Armed Revolt, Dollar Weakness
ByMark Shenk-Apr 8, 2011 3:53 PM ET
Crude rose above $112 in New York for the first time in 30 months and Brent topped $126 on skepticism that Libyan output will rebound when fighting ends and as a weaker dollar increased demand for raw materials.
Oil climbed 2.3 percent in New York as Barclays Capital said strikes on Libyan fields by forces loyal to Muammar Qaddafi ended hopes for a prompt export resumption and may send prices toward $130 a barrel. Commodities also gained as the dollar fell to the lowest level in more than a year against the euro.
“Since the Libya unrest began, there’s been a re-coupling of the inverse relationship between the dollar and oil,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “The Middle East is being used as cover by speculators looking to send oil higher.”
Crude oil for May delivery rose $2.49 to $112.79 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 22, 2008. Futures advanced 4.5 percent this week and are 32 percent higher than a year ago.
There you have it: speculation is the true reason why oil and gas prices are too high. Just like in 2008, when the price of oil topped out at 147 per barrel, speculators drive up the price and just like their cousins on Wall Street who collapsed the economy, the favored few that pay the politicians to play, the middle class suffers.
Posted on Thursday, January 14, 2010
Trading commission proposes curbing speculation in oil prices
By Kevin G. Hall | McClatchy Newspapers
WASHINGTON — In a move aimed at limiting financial speculators’ ability to drive up oil prices, the Commodity Futures Trading Commission on Thursday proposed restrictions on the number of energy contracts that any single investor can hold and new limits on the trading activities of Wall Street banks.
The commission staff proposal comes amid growing research that suggests that the record high oil and gasoline prices in 2008 were due in part to excessive financial speculation. Much of that speculation came from Wall Street powerhouses such as Goldman Sachs and Morgan Stanley.
“Today’s meeting is an important step,” commission Chairman Gary Gensler said.
Before 2001, there were limits on how much control any one investor could have in the energy markets, a term called position limits. The limits disappeared amid an era of deregulation, and by 2004 oil prices were climbing sharply as the global economy grew. Crude oil prices peaked at $147 a barrel in July 2008, then crashed along with the economy later that year, to $56 a barrel. Oil is trading at just under $80 a barrel this week.
GOP admits speculation is helping boost oil prices, moves to gut speculation watchdog anyway
March 19, 2011
The Commodity Futures Trading Commission (CFTC) — which is charged with policing the country’s futures markets — said last week that speculation on energy futures, including oil, is at an all-time high. The Dodd-Frank financial reform law gave the CFTC the ability to issue limits on oil speculation, but agency missed the deadline for implementing the new rules, partly due to reluctance from conservative members of the CFTC board (which is a problem President Obama can address in June).
But even if the CFTC were stepping up, budget cuts favored by House Republicans would render market oversight vastly more difficult, as WonkRoom explains.
H.R. 1, the House Republican-approved spending plan for the remainder of 2011, cuts the CFTC budget by nearly one-third, which would force the agency to lay off nearly 30 percent of its staff. CFTC Chairman Gary Gensler has said that if the GOP budget cuts were implemented, “We would not be able to police…or ensure transparent markets in futures or swaps.”
And Republicans are forging ahead with these budget cuts even though they agree that oil speculation is increasing prices:
Rep. Ed Whitfield (R-Ky.), a senior House Energy and Commerce Committee member, recalled prior oil-speculation hearings and said “there was no question that that had some impact” on the 2008 uptick. “I think there is a combination of reasons for the recent spike,” he said in an interview yesterday.
Rep. Mike Simpson (R-Idaho), chairman of the House Appropriations subpanel in charge of EPA and the Interior Department, said policies at the departments he oversees play a role in rising prices but agreed that speculation does as well. “Traders look out and see what’s about to potentially happen, so it has to do with speculation,” Simpson said in an interview. “That adds to the overall equation.”
Both Whitfield and Simpson voted for the budget cuts in H.R. 1. Rep. Walter Jones (R-NC), however, voted against H.R. 1 ( one of just three Republicans to do so) and sent a letter to the CFTC asking that it enforce the speculation limits set out in Dodd-Frank. “Most oil market experts agree that excessive, unnecessary speculation by Wall Street traders is part of the problem,” Jones wrote. “Further delay by the commission leaves consumers and markets exposed to manipulation at a time when this nation can least afford it.”
Gensler appeared before a House appropriations subcommittee today to request increased funding for the CFTC, but the subcommittee’s chairman, Rep. Jack Kingston (R., Ga.), was unmoved.
Oil prices are too high. Period.
By Paul R. La Monica, assistant managing editorMarch 1, 2011: 2:47 PM ET
NEW YORK (CNNMoney) — Crude oil is trading at about $99 a barrel. That really doesn’t make a heck of a lot of sense.
It’s hard to not look at the huge spike in oil in the past week and immediately cry out: Speculation!
To quote the omniscient narrator from the canceled before its time ABC show “Pushing Daisies” — The facts are these.
There are no legitimate supply concerns regarding oil right now.
Yes, Libya is a worry as rebels try to wrest control of the world’s 15th largest exporter of oil from Moammar Gadhafi. (You say Khadafi. I say Qaddafi. Let’s call the whole thing off.)
But even though there have been cutbacks in Libyan oil production, Saudi Arabia has increased its production to try and offset the loss of Libyan supply.
“The Saudis have said they will supply anything Libya can’t. Even if you take other countries like Yemen and Oman out of the equation, there is not going to be a short-term fall in supply,” said Doug Ober, CEO of Petroleum & Resources Corporation (PEO), a closed-end fund based in Baltimore that invests in energy stocks.
Ober also noted that there finally should be more supply coming from the Gulf of Mexico again. The Obama administration approved a deepwater drilling permit for Noble Energy ( NBL) on Monday, the first in the Gulf since last April’s BP (BP) oil spill disaster.
Matt Freund, a portfolio manager with USAA Investment Management Co. in San Antonio, added that there is a healthy amount of oil in storage, which should alleviate any concerns about a supply shortage.
It also may be a stretch to suggest that the problems in Libya, even though they come soon after populist uprisings in Tunisia and Egypt, will really spread in a significant way to even larger producers of oil in the region, such as Saudi Arabia and Iran.
Rumors seem to be playing more of a role in what’s going on with oil than anything else. Crude prices popped Tuesday morning on reports (which later turned out to be false) that Saudi Arabia was sending tanks to neighboring Bahrain to help quell unrest there.
“The run-up in oil prices is all due to concerns about ‘what-if’ situations,” Ober said. “None of the fundamentals have really changed.”
It’s even more bizarre to wonder why new governments in any of these nations would suddenly decide to shoot themselves in the foot by disrupting the supply of oil given that this export is still their lifeblood.
John Derrick, director of research with U.S. Global Investors Inc., a money management firm based in San Antonio, said that the problem facing investors is that the region, to put it mildly, is highly volatile. Nobody can say with any certainty what will happen next.
$4 gas? Depends on where you live
Still, Derrick said there is too much speculation built into the price of crude.
“People are pricing in the unknowable,” he said. “But if Libya settles down and there is no other major unrest, oil prices could pull back $10 bucks or so. Crude closer to $90 seems more reasonable.”
Speculation, not fundamentals driving oil prices
By Bhamy V Shenoy
Over the years oil pundits have learnt one hard lesson that it is impossible and even risky to predict oil prices.
But Wall Street financial trading firms were boldly forecasting that crude oil price will reach or exceed $100 in 2011 even before the Egyptian revolution. Some firms which even predicted that they may even exceed the historical high price of $147/b reached in 2008.
The revolution in Egypt may affect no more than 3.5 million barrels per day (MMBD) of world crude oil moving through Suez canal and SUMED pipeline in the worst case. Since oil inventory is more than adequate and shipping capacity is in surplus, any disruption will have little impact. Still, soon after the revolution prices did exceed $100. Some even predicted that it may exceed $200. Later they came down a bit. Currently there is a lot of renewed interest to find out what factors actually drive the oil prices — speculation or fundamentals?
Fundamental factors affecting oil prices are: demand for petroleum products influenced mostly by economic growth, production of crude oil, policies of OPEC to limit oil supply, oil inventory levels, refinery capabilities, shipping tonnage, supply disruption because of civil war, terrorism, strikes, etc. All these fundamentals do not justify the current high oil prices.
In fact, if prices were determined purely by free market economy, they should have been below $50 to $60 barrels based on marginal cost of oil production. The long term oil price forecast made only five years back for 2020 by Energy Information Administration (EIA) of the US was less than $50 per barrel. Forecasts made by International Energy Agency (IEA) and most oil experts were no different. There have been no dramatic changes during these five years to affect oil prices.
The latest IEA oil market report estimates 2011 world oil demand to be around 88.8 MMBD which is 1.4 MMBD higher than in 2010. With OPEC having more than 5.6 MMBD surplus capacity, there should be no problem in meeting such a small increase in demand even if there is some minor disruption in Niger delta or Iraq or the above mentioned Egyptian revolution.
During the recent historic oil price increase it was argued that the shortage of light crude oil might have been the driving force behind high oil prices. With more than five years to upgrade the refineries, this apparent problem has been also solved as can be seen from the narrowing difference between light and heavy crude oils. Product and crude oil inventories are also at satisfactory level if not more than adequate. OPEC’s production ceilings are not strictly adhered. Every OPEC country produces over its target. In short the industry is supplied with more than needed amount of oil and also of the right quality. What does then drive the oil pricing?
It has become a fashion to correlate dollar value with oil pricing as though the former is a driving force. There have been times when there was good correlation between dollar declining and oil prices climbing. But this need not prove causation. However, in recent months, even when dollar has gone up, oil prices have climbed.
Another factor which is the driving force for higher crude oil price is the high level of speculation by the Wall Street traders who are treating oil as another asset like stocks, bonds, gold, etc for diversifying their investment to earn above average return. When crude oil prices reached a high in July 2008, outstanding futures and option contracts for oil were at maximum. Wall Street investors after being burnt by stock market, real estate bubble, and sub prime mortgage scam were diverting investment into oil market creating demand for paper barrels. At times paper barrels were more than ten times the average daily demand for oil. It is the same factor which has driven high oil prices after the fall of oil prices to $40 level in early 2009. It is in the interest of the wall street trading banks to hype the prices by predicting higher prices.
We need to question how and if the futures market serves the economy, oil market or the consumers. The usual answer given by the economists is that futures market helps discover the price and also helps the market participants to hedge their risks. These two should help the consumers since it would improve the efficiency. When we compare the market conditions prior to the implementation of oil futures trading to the current, a strong argument can be made that consumers have been taken for a ride by the speculators and their unintended beneficiaries are the oil exporting countries.
There have been some feeble moves by the US congress to regulate the futures market. However it may not be enough. Intercontinental Exchange (ICE) market which is regulated by the UK has no such regulations in comparison to the New York Mercantile Exchange (NYMEX) in the US. Unless there are strict regulations to keep the speculators out of the futures market we are going to see speculation driving the prices and not the fundamentals.
NYMEX and ICE have become huge sophisticated casinos attracting billions of dollars. Unlike Las Vegas casinos where bets result in zero sum game, price discoveries made by these markets result in transferring trillions of dollars from oil importing countries to oil exporting countries. It is high time that G-20 takes steps to put a stop to this gambling game.
(Reuters) – Two top energy market operators redoubled their defense of speculators on Wednesday amid renewed concerns in the oil market, arguing that speculators are misunderstood and often too quickly blamed for price spikes.
Oil speculation: It’s back
There’s more of it today than there ever was this summer. And this time around, it really is making oil more expensive.
By Jon Birger, senior writer
Last Updated: December 5, 2008: 1:55 PM ET
NEW YORK (Fortune) — With oil now at $50 a barrel, you no longer hear Congress complaining about oil speculators. The irony is there’s probably more real speculation going on today than there ever was back in June and July.
I’m talking about the type of speculation that involves hoarding oil today so it can be sold for more down the road. Today’s speculators are actually buying oil. They’re not merely flipping futures contracts without taking delivery – which is what hedge funds and commodities index funds were doing when they were in the crosshairs of Congress this summer. As I’ve argued before, investors who trade futures but never take delivery of actual oil can’t have a material impact on oil prices because their trading affects neither supply nor demand.
What’s different now is the structure of the futures market, which is giving big investors an incentive to buy and hold huge sums of crude. Specifically, the November 2009 price of oil is considerably higher ($12 a barrel higher, to be precise) than the spot price – a scenario futures traders call a “contango” market. (The opposite scenario – spot prices higher than futures prices – is known as “backwardation.”)
“The steepening of the contango has opened up carry-trade arbitrage opportunities that are slow to be closed due to constrained credit conditions,” Goldman Sachs wrote in a recent research report. Translation: this is a great time for investors to be hoarding oil.
Today’s market is giving Goldman clients and other well-heeled investors an opportunity to buy oil in the spot market for $50 a barrel, sell it forward in the futures market for $62, and then pocket the $12-a-barrel difference, less storage costs.
This type of oil investing was quite popular in 2005 and 2006 when, like today, the price of oil one year out was much higher than the spot price. Back then, contango trades were so popular that one of Morgan Stanley’s top energy traders, Olav Refvik, leased so much oil storage that he earned the nickname “the King of New York Harbor.”
There’s no question the investing strategies pursued by Refvik and others were pushing up oil prices. By putting large sums of oil into storage, they reduced the supply available to consumers. By 2007, however, the gap between spot prices and futures vanished, and so did the opportunity to profit from that difference. And the amount of oil held in inventory began to fall.
Nevertheless, Congress needed a scapegoat for rising oil prices and an easy target proved to be hedge funds and other investors dabbling in oil futures. But these pseudo-speculators were simply making a bet on the direction of prices; they weren’t driving them. Their gains (or losses) came out of the hides of the investors or airlines or oil companies on the other sides of their trades, not the oil-consuming public. Moreover, a lot of commodities hedge funds were actually making the wrong bets: According to Merrill Lynch, the average commodities hedge fund had a negative trailing 12-month return through June.
Unlike futures flippers, contango traders really do impact oil prices, yet they’re getting a free pass. According to the U.S. Energy Information Agency, domestic oil inventories have risen 9% since oil prices peaked in early July. While some of that is attributable to the weak economy and slack energy demand, gasoline consumption declined only 5% over the same period and gasoline inventories have risen only 4%. (If you’re wondering why contango traders would target crude oil but not gasoline, vaporization issues make gasoline harder to store.)
Demand for oil storage is so keen today that some big investors who can’t secure storage on land have resorted to leasing supertankers and using them as floating oil tanks. For example, the U.S. oil trading firm Koch Supply & Trading recently leased the 2-million-barrel-capacity Dubai Titan, a Koch spokesperson confirms, the third supertanker Koch has leased this year.
It’s hard to quantify exactly much lower gas prices might be were it not for the current speculation. In the United States alone, crude oil inventories have increased by 27 million barrels since early July, the equivalent of about 200,000 barrels a day being pulled off the market. Based on the estimates I’ve seen, a 200,000 barrel-a-day decrease in supply could raise gasoline prices by anywhere from 20 to 40 cents a gallon.
For the average consumer, that’s real money. But I bet you a barrel or two that actual oil investors like Koch never get targeted by Congress the same way the hedge funds and index funds did this past summer.
After all, who needs a scapegoat when gas is $1.90 a gallon?
Oil Prices means speculators