Is This Oil Price Manipulation?

Bloomberg reports that crude oil could return to $50 a barrel as OPEC cuts production. Now I have to mention they were not cranking up production when oil was at $147 a barrel, but they are good at cuts on the other end of the spectrum.

Nonetheless, I just read last week that inventories are at almost peak capacities, oil tankers are full and sitting at docks and the glut in the market is incredible. Even with cuts, the price should not go up any time soon. It is truly amazing that the prices are as high as they are, but methinks something stinks. There are various links in the pipeline between the oil coming out of the ground to getting into your car and I suspect there are several places where the pipeline is getting squeezed, like at refineries.

Overall, there seems to be plenty of oil out there at the moment, so why would cuts by OPEC make a big difference anytime soon? If you know, you tell me.

Disclosures: None.

Comments

[The Greates...:]

Americans, if you’re surprised at the current world economy, don’t be. We live in a global economy. What affects the whole world affects us as well. 13 OPEC countries and 5 major oil companies have their finger on the pulse of the worlds economy. It is called a monopoly, we need to restructure the commodities market regulations ASAP. Call, write, email and fax your representative and tell them today.

Mar 09 08:56 AM

[Wallace Werner:]

I believe all of our problems now were caused buy the greedy OPEC countries and gasoline producers. It is still carrying over. It caused the auto industry to go down the tubes and is still affecting auto sales. People do not trust OPEC when they try to reduce production to falsely increase the price of oil. Refineries are screwing the puplic right now with gasoline at $1.90. Based on the price of oil being 1/3 of the highest price. Gasoline should be at $1.33 per gallon. If people knew that gasoline would stay below $1.33 per gallon consumers would be buying more cars. The automobile manufacturers haven't actually produced cars with good fuel economy. They advertise a car acheiving 30 mpg on the highway and think they are doing something. I had a 1988 Olds Toronado that got 32 mpg. America wants large cars and SUV's to get good mileage and for the price of gas to stay below $1.33. People want large cars because they are a lot safer than those teeny weeny cars. Auto manufactures need to get with the program.

Mar 09 10:18 AM

[User 283977:]

Actually it’s a cartel, and they are illegal in the US. This is a classic example of why the US's policy of dependence on foreign oil must be curtailed (when ever I see the word curtailed I think of O' Brians Dr. Marturin's joke about the dog watch). These cartels have been artificially manipulating the price of oil since OPEC was created. Free markets don't exist with oil. Strange this point does not come up much among the champions of a free market philosophy.

In many cases free markets are just an illusion designed to put blinders on the US consumer while we are robbed blind. Artificially high prices in oil equals high returns for all the middle men, and of course those fixed percent tax rates at the pump. Everyone has their hands in the American consumer's pocket, including most of our so called elected "representatives" who are supposed to be looking out for us.

Mar 09 11:04 AM

[Black Bear:]

I don't think the oil refineries find it advantageous to do anything to raise the price of oil. Because it is the basis of all of their products they profit from low oil prices and high gasoline prices!

Mar 09 11:04 AM

[Mmarrkk:]

Wallace: your $1.33 comes from where?? You can't just use a simple proportionately to figure if oil prices dropped "X"%, then gasoline should also drop the same "X"%. Much of the price of a gallon of gasoline does not change at all when crude oil prices go up or down. So there is a fixed component which is a majority of the price. And taxes are one of the biggest components. The "floor" on gasoline prices is over $1/gallon even if the crude oil is "free". I believe Conoco has a site where they break down the price of a gallon of gasoline by its various components. If I can find it again I'll link it.

Mar 09 11:38 AM

[Jonathan Ch...:]

There is a lot of silliness about oil. It's all very simple:

1. Oil resources are a limited commodity, and the easiest, cheapest oil has been produced.
2. MOST oil is controlled by governments (Venezuela, Russia, Saudi Arabia, Libya, Mexico) not the oil companies.
3. Governments are very poor at developing oil, though they do very well at expropriating (nationalizing) the oil found by others.
4. Oil supplies did not increase as oil prices increased because there was there was NO EXCESS capacity during the boom. There is now, for a short time, some excess capacity.
5. Base demand continues to increase, while new oil finds are decreasing. Not good long term unless you own oil.
6. Much of the projected and very high price of future oil is based on believing the Arab statements about how much oil reserves they have. if those unverified statements are false, we are in for a world of hurt.
7. I believe those statements are false and misleadingly high.
8. I am an optimist

Mar 09 11:38 AM

[longoil:]

Jonathan,

Thanks for your excellent input on this often misunderstood topic.

I would also add, that OPEC only controls 40% of the world's oil supply and expanding on Jonathan's point #6 and #7 OPEC reserves are deliberately overexaggerated. Between 1981 to 1985, Canterall, Prudhoe Bay and North Sea all come on line and glut world oil market with 20% excess capacity. Oil prices tumbled from $40 /barrel to $10 barrel. At the same time OPEC members lost 75% of their revenue. OPEC production quotas are based on a percentage of self-declared reserve sizes. Shortly afterwards OPEC members all boosted their reservation numbers (with no geological data to back up their claims) so that they could sell more oil and make up for the recent shortfall in revenues.

For details see the BP chart in the link below:en.wikipedia.org/wiki/...

Mar 09 12:15 PM

[Tomcat101:]

The towel heads don't seem to realize that if they jack the price of oil back up that it will squash or at least put a damper on any economic recovery, which will in turn cause them to sell less oil.

If they keep the price low they will sell more oil and make more money.

Mar 09 12:31 PM

[PooBah_1:]

Also,

Capacity in oil stocks are off their highs. last three/fours weeks they have come off the five year seasonal average. Feb 6th stock were 31 MMBO over the 5 year average. Now, stocks are 27 MMBO over the 5 year. So basically, demand has picked back up and those historically high stockpiles of oil are starting to be drawn down.

Also remember, all that oil in storage floating aroung isn't always headed to the US. Most of that is going to China and Japan. The oil that is in the Gulf on tankers being rented for storage is more less mute, they will sell it when summer driving season calls for more gasoline, it will get siphoned off with little real impact to crude stocks. More psychology than actual effects to crude stocks.

Just my opinion.

PooBah

Mar 09 12:45 PM

[BrotherMaynard:]

peak oil or not, it is a fact that markets are much more "loose" than they were 6 months ago...more oil is above ground, in storage.

But what is bothersome isn't necessarily the absolute price level, but rather the volatility that shows 5-10% daily swings in the price of WTI...we were told (via the numerous congressional hearings) that this sort of volatility was supposedly only a phenomenon in a "tight" market. It seems like volatility has only increased as markets have become less "tight."

Again, it seems like 1-2% moves are now the exception, rather than the rule. The day the US invaded iraq (for the first time) oil went up 5-6%...to tell me that virtually no news today is worth a 10% daily movement is way too much to ask.

With considerable slack in the markets, yet heightened volatility also present, it makes me wonder how big of an impact specs are having on the markets. USO and ICE were not around in the early 1990's: given that we have almost as much supply slack as 1990 and an even worse demand situation, the only thing different is the presence of massive spec capacity. this slowdown really pulled the curtain back on this destructive mechanism that seemingly magnifies every insignificant event 10-fold. and seriously, USO has 25% of WTI contracts outstanding...how has the CFTC done nothing about this!??

Mar 09 01:00 PM

[Mad Hedge F...:]

Watch crude like a hawk. Traders looking for the Next Big Play are keeping a laser like focus on two key commodities. Chinese stockpiling prompted copper to break out of its recent trading range to the upside to $1.70, taking lead producer Freeport McMoran (FCX) up 30% on the week. Crude rose 15% to a high of $46. These impressive moves happened during a week when global equity markets were in complete freefall. This suggests that the bulk of the world’s growth will be in emerging economies, and that the next round of commodity buying will be even more ferocious than the last. Since I believe that the future is all about the ascent of hard assets over paper ones, this is music to my ears.

Mar 09 01:03 PM

[InvestInOilNow:]

It is realistic that oil prices stay high only because it’s a game, can’t you see the “Carrot” dangling in front of you..

Oil dependency is bad, let the price stay moderate.. What would happen if oil was $1.00 a gallon? USA would burn it up as fast as we could get it. Sure it would boost the economy (short term), but what would happen after we use up all of the reserves? OPEC would be in major control again.

Let's keep thinking long term, and keep up the alternative fuels in progress, don’t abandon the idea of solar, hydro, ethanol, and electric just because oil prices are currently down.

Mar 09 01:22 PM

[wisurvey:]

Seems to me there is a lot of upside pressure on oil right now while there is a ton of supply floating around and US stockpiles are almost full. US refiners have kept a lid on gasoline supply in order to recover profits lost from the oil ride up to $147 bbl of last few years. So, US refiners slowed production (call it retrofit or whatever) and since we haven't built any refiners in like 40 yrs +. With US summer starting in a few months this will probably mean higher prices at the pump but not necessarily higher crude prices. The excess supply needs to be worked through however that may take major cuts from producers or substantial usage increases overseas. China seems to be headed for 8% GDP growth (if we can believe them); but I'm not convinced that will eat up the supply. Seems the refiners are calling the shots for now. Means a roller coaster ride on crude until next year (?) and probably pump increases in US for summer. Refiners may be a decent short term return. Buy relative lows on crude for next 12 months or more.

Mar 09 01:46 PM

[Alex Filonov:]

Price of oil is defined by prices of oil futures. There is still more speculation in price than supply/demand equation.

Mar 09 01:51 PM

[samwise:]

Totally agree with Alex above. It's all speculation and has been nothing but for the past 2 years. The gyrations of the price of oil makes doing even baseline budgeting at the business level almost impossible. Is oil about to go back to $150? Shouldn't it just be expected? Clearly hiring anybody in this environment is a bad idea when your own government can't predict what the price of oil will be in the next 4-6 weeks. still, "why let a crisis go to waste." in other words--total silence from all the lawyers while the price of food simply begins to soar, too. Jim Rogers has been spot on.

Mar 09 08:14 PM

[fairguy:]

the general public are so blur about oil and economic in general. Blaming auto sales to high oil price shows it all. Low auto sales is because it is hard to get a car loan and high unemployment caused by the financial crises emanated from the US and EU, the lands of the free market and free reign speculation. Don't blame OPEC for the price unstability. Don't blame the oil companies either, if u think gasoline is too pricey, don't drive. You live in a free country, right? I drive a 3.5 ton suv. Why? because i find gasoline is underpriced, cheap. Yes, even at 3 to 3.5 $/gal.

Mar 09 11:51 PM

[hsr0601:]

I guess the great depression had a great deal of natural energy sources, today the current initial depression has great technologies instead. It is likely that this moment is the last chance to survive as the environment to invest in a new energy base is going to be getting worse down the road.
I would love to suggest 'A Global Green New Deal' and stress only two recent progresses:
1. Researchers at MIT have designed a new battery that can recharge devices about 100 times faster than conventional lithium ion batteries. The design could lead to electric car batteries that charge in 5 minutes

2. Breakthrough Spin Battery Size of Hair Could Run Electric Car For Miles:
the actual device has a diameter of a human hair, the energy that could be stored in it could potentially run a car for miles.
Physicists at the University of Miami and Tokyo and Tohoku have invented a radical new type of battery in the laboratory. The profound findings were published in the journal Nature.

As the oil reserve declines, even the oil-rich UAE is committed to renewable energy movement, which is also in the oil-producing countries' interest, even if they keep silent, accordingly they will not keep the oil price low, I suppose.

Thanks.

Mar 14 04:59 AM