Tmalan

Why I'm Not Buying Oil's Recent 'Correction'

John
Pseudonym

Even if oil reaches to $100, you will not see cheap gas any time soon if ever again. Refineries have been eating a lot of the oil price on their side and the lower oil price will just bring their cost back in line. $3 + gas is probably here for a while. So, I do not see a mass return of gas guzzling SUV driving.

However, if oil reaches back down around $75 and STAY there, you may see gas drop to below the $3 mark.

What's the Right Price for Oil?

There is also the variable as how much the cost of oil goes into inflation by companies that transfer the extra cost into the products and services. Dow Chemical is good example of this.

So, it can be argued that oil is trying to find a "true value" in the marketplace. This would be a price that did not transfer a large amount into inflation and created demand destruction without it being so drastic.

There are many handicaps with oil finding it's true value since countries like China subsidies and how slow companies are to increase prices due to raw inventory costs. So anytime you have a quick run up in oil price, the true effect is buffered and slowed. It would be better if the price of oil gradually increased over time so as to be able to better see the effect of the price increase.

Also, inventories of oil thinning out would be an effect of over value. You would not keep the normal amount of inventory of anything if you felt the price was to high and would come down fairly quickly. This would be like filling your gas tank up full and then the next day the price at the pump drops 5 or 10 cents. I do not know about you, but since oil has been dropping back, I have only been putting about 5 gallons at a time in my tank instead of filling it up.

Confirmatory Bias and Oil Investing

Presuming oil is going to drop to a realistic price, I really think the best thing to happen would be that gas goes down to a goldilocks price. Not to high to help the economy and inflation correct back, and not to low as to stop the pressure of alternative energy and fuel sources.

What We Can Do To Reverse the Oil Crisis

One thing that I have not read about or missed if someone has touched on is the fact that if oil continues to increase in price, the amount of cash return when a profit is made in true value declines.

That is, since oil effects the cost and inflation of almost all products and services, the real cash value decreases on returns since the dollar value declines. I mean, I can not pay my house payment or go out and pay for my hdtv with oil(at least not yet). So, money has to have some real value against oil and other commodities and can not sustain a continued loss against them.

So basically, piling investment money into commodities that are the bases for an economy creates no real capital and can only be a temporary profit.

These investment firms either know this and will pull out at some point, or they are stupid as hell.

Also, if you think that changing currencies to the Euro would make a difference, It might for a while. But, any economy that uses oil and other commodities will eventually lose true value up against continued price increases on the commodities.

The Effects of Oil Speculation

"If the speculators have better information about the future then this should be helpful, i.e., the price impact should help the oil market."

That is exactly the problem. Demand data can be measured very accurately, however actual real supply can be ambiguous.
The supply chain has to many hands in the pot making the data inaccurate and left to opinion.

"if there is at some point more speculation on the short side then this can push the spot price down."

As soon as this starts to happen, a fresh new round of BS propaganda comes from the Middle East to bait investors back. There is no doubt in my mind that the Axis of Oil are cashing in on the over valued price and will do everything they can to keep that extra money coming in.

Options Trader: Friday Outlook

There has been considerable demand destruction already in the US. There will continue to be more in the US and other countries. None of this seems to weigh enough against a virtual threat from the Middle East.

The Axis of oil have the ability to control supply. As demand continues to drop, they can enviably produce less to keep inventory tight. How would anyone know the difference in taking less out of an oil field in order to control what is taken out vs the oil field going towards the end of the fields capacity? Who oversees this? Are they allowed to go into countries like Iran and do oil field checks?

There is too much uncertainty in the market and it is being driven by fear not facts. Yes, I do agree that demand has increased and will continue to increase provided the price comes back down to earth. However, the supply side is the uncertain variable with what seems like unlimited opinions on the subject.

This is why opening up the SPR and increasing the dollar with a rate increase will diffuse the fear and bring back stability to the market. I also agree that this should preclude opening up more offshore/Alaskan drilling for future supply streams.

The combination of these elements would remove the fear, remove incentives for propaganda, and remove the index long calendar investor who no longer would see the potential for profit.

Normal speculators then could come back into the picture and perform their normal futures trading to hedge on normal trade price fluctuations.

Options Trader: Friday Outlook

"Im sure the US traders trade against those bad people to keep oil down because they are worried what high prices will do to our country."

Can you explain this a little better? I do not understand how they can trade against Iran directly in an Oil futures market. From what I understand, producers (which I believe would be OPEC here) do not lose any money on futures. They break even when the future expires when in contango or selling on spot market when in backwardation. Either way it is a net sum in the difference in price.

They would however, make profit from the delivery price vs the cost of producing, storing, and/or shipping the oil when that difference is positive for them. Am I mistaken?

Blogonomics: Market Manipulation?

"it fell yesterday, too. In fact, the stock has been going steadily downwards for a couple of weeks now"

I guess your saying that being on the verge a bear market has nothing to do with it. Kind of like saying a man is sinking when the ship he is in is what is sinking.

IEA's Oil Market Outlook: Off the Mark

Did the IEA predict the current demand destruction going on in the US last year? Of course not, Index investors are really putting a new twist on how to accurately predict future supplies and demand.

We Can Lower Gas Prices Now If We Drill, Drill, Drill

Any increase in future supplies would be good, however to reduce the current price it would have to be a very very significant supply increase. And, just recently, Saudi Arabia announced significant future production increases. Additionally, there has been demand destruction in the US. None of these factors has had any impact on prices. This leads me to believe that the contracts are being artificially inflated to keep the market profitable. Also, I think oil producers are and can reduce production to keep supplies "tight" when they receive demand reduction data, thus controlling the market psychology.

Oil: If It Looks Like a Bubble...

The current pricing is not sustainable, whether it is a bubble or not. It is already having an impact globally. I have not heard of one country that uses oil where their inflation is going down. Having all the other food commodities in the same boat will have an impact on the developing world's ability to afford the high cost of oil and dampen the demand at least for now. The balance curve has swung way to far in the other direction.

The thing that concerns me is how much control oil producers seem to have right now. Please tell me if I am incorrect in deriving my conclusion, but it seems to me if you have so many future contracts bought ahead of time, you have a fairly accurate picture of how much you need to produce to meet those contracts. Then adding the fact you can get real time physical demand information allows you to control the supply. This allows the producer to have tighter inventories thus fueling the "tight supply" psychology. I think that there is evidence of this when Libya made their announcement that they may cut production. Why would they do that if there is such a high demand? Retaliation or not, you would not do this if you were making major $$ on what you are producing. Seems more logical to suck money from America if the demand was there. The only conclusion is to keep inventories from building so that they can keep prices from falling.