Oil Traders, Not Political or Supply Concerns, May Be Pushing Fuel Toward $100

[n2doc]

By Steven Mufson
Washington Post Staff Writer
Monday, November 5, 2007; Page A01


After a week of new records for crude oil prices, the question is: How high can they go?

In the past 10 weeks, the price of crude oil has shot up $25 a barrel, closing at $95.93 in New York on Friday, an all-time inflation-adjusted peak. Unlike earlier spikes in oil prices, which came on the heels of war in the Middle East, this latest ascent does not appear to be linked to any one conflict or to any physical shortage. Instead, traders who treat oil like any other commodity are widely thought to be driving prices upward, bolstered by a weak dollar and money flowing out of stock markets and other investment vehicles.

So far U.S. consumers have not felt the full impact. Sluggish U.S. gasoline demand over the past two months has made it hard for oil giants to pass through higher costs; refinery profit margins, which hit records in the spring, have been squeezed. But if high crude oil prices persist, they will flow through to the gas pump. Yesterday, the Lundberg Survey reported that the average retail price of regular gasoline is up 16 cents in the past two weeks to $2.96 a gallon.

Many veteran oil analysts say this is a bubble. Oil is historically a cyclical business. Modestly higher production by the Organization of Petroleum Exporting Countries, a warm winter, slower U.S. economic growth and a flattening of demand in the United States could puncture these lofty prices.

"It just seems that the market is spasming here," said Adam Robinson, an oil analyst at Lehman Brothers. If slowly declining petroleum inventories start to build again, he said, "the radical increase we've seen to the upside can repeat on the way down." Oppenheimer & Sons analyst Fadel Gheit says oil is $30 a barrel overpriced.

But analysts also say that the past 10 weeks have demonstrated the power of traders at investment houses. Deutsche Bank oil economist Adam Sieminski, who spent six months on the bank's trading desk, said it is important not to underestimate the role of sentiment and technical factors, such as patterns of price movements and the need to hedge risks in other markets. Now, when investors hold a large number of options to buy oil at a price of $100, he says, "it's almost like magnetism. It draws prices to that level."

more:
http://www.washingtonpost.com/wp-dyn/content/article/2007/11/04/AR2007110401753.html?hpid=topnews

[puerco-bellies]

1. One more time..

It is not the traders or speculators that are driving the price. The oil traded on the N.Y Merc is only a tiny fraction of the petroleum products produced and sold in the U.S. Think about it. Do you think that crude produced from say, Mobile owned or leased fields, transported in Mobile owned tankers, delivered to Mobile owned refineries, and sold in Mobile owned outlets cost $90+ dollars a barrel to Mobile? Take it from a guy that used to trade commodity's, it ain't the markets that control the overall prices.

[razzleberry]

4. people sell to the highest bidder,

if you owned a well, and could lift oil for ten bucks.

how much you going to sell it for.

12 or

90?

when oil is changing hands for 90

[Maven]

5. Thank you.

This BS has already been debunked, but I guess it's more comforting for the MSM to call it a bubble and laugh nervously than say "we're heading over a precipice."

Even OPEC has acknowledged that no one has any spare capacity to keep oil prices from going further and further up.

[n2doc]

7. ok, then explain why oil is different from wheat, or gold

There are plenty of examples of traders manipulating prices. Remember the infamous Hunt Brothers? Or are you saying that oil is just too big to be manipulated?

All commodities can be manipulated if enough money is thrown at them.

[Maven]

8. Please see this article at TOD

which also links to prior research on the subject.

http://www.theoildrum.com/node/3157

[puerco-bellies]

9. You don't have to minipulate a market you have complete

control over. The majors control over 95% of the petroleum products retailed in this country. The extraction, transportation, refinement, distribution, and retail. Only a drop is traded on the boards, compared to an ocean actually sold to end consumers. The market is sewn up, no room for any one else to "game" the oil markets, even if another entity had the resources to compete with the likes of big oil.

[razzleberry]

2. where does the oil go?

suppose a trader buys a future.

sooner or later, that future is deliverable.

is the oil being stored on ships, or what?

[puerco-bellies]

6. Most futures contracts are not deliverable.

Most are simple speculative futures, and options. Only major consumers of a commodity write deliverable futures contracts as a pricing control, i.e. we know that in aprl, 08 we will pay X for this product, or we we be able to sell X at that price at that time. The major oil companies bypass that market and just pocket the theoretical "price".

[RUMMYisFROSTED]

3. The price of a barrel quadruples...

...the cost of gas doubles.

[JDPriestly]

10. In my former life in the oil spot trade, the big oil corporations

had long-term contracts at stable prices. The spot market was for small oil companies. Also, big companies would buy oil as needed to supplement what they were getting on their contracts at the spot market prices. I believe also that prices differed according to the quality of crude and the origin of the crude. I suppose the prices that are generally quoted as the price for oil are for the specific crude selling at the highest price on the spot market. Things may have changed a lot since my previous incarnation, however, I believe there is a huge difference between what is actually paid for the average barrel of crude and what is cited as the spot market price. So the spot price means something, but its meaning should not be exaggerated.

[depakid]

11. Typical Post- not just uninformed- but misinformed

And of course, citing Yergin et al.

That paper's so pathetic, that sometimes, all one can do is laugh.