Wednesday, April 25, 2012

Gasoline-Futures Prices Tumble 16 Cents in Last Week, Due to Market Forces: Increased Oil Supply

Well now those greedy, market-destabilizing, market-manipulating speculators have changed course, and they're now driving gasoline futures prices down, see chart above from the CME.  From today's WSJ:

"U.S. gasoline-futures prices have dropped 16 cents a gallon over the past eight trading days, as more U.S. crude becomes available for refining into gasoline and fears about a shortage of refining capacity fade.

Helping to spur the downturn is the reversal of a pipeline's flow that will give refiners in the Gulf Coast region greater access to crude, the basic feedstock for gasoline. North Sea Brent crude, the European benchmark which holds sway over gasoline prices, already has fallen by more than $7 a barrel this month, partly on this development."

MP: In other words, the price of gasoline is actually being determined by market forces, specifically an increase in the supply of oil, and not by speculators.  


17 Comments:

At 4/25/2012 3:42 PM, Blogger Methinks said...

From professors Scott Irwin and Dwight Saunders on the number of contracts held by speculators (specifically evil index fund speculators who are supposed to be financializing oil to the detriment of Benjamin's purse)

http://www.farmdocdaily.illinois.edu/2012/04/speculation_and_gasoline_price.html

And if anyone is interested, here's an NBER working paper by Jim Hamilton called "Understanding Crude Oil Prices which was sent to me today by my friend, JJoxman:

http://www.nber.org/papers/w14492.pdf?new_window=1.

 
At 4/25/2012 4:27 PM, Blogger Unknown said...

US domestic crude oil production exceeded 6.1 million barrels/day last week, first time since November 1999.

DATA

 
At 4/25/2012 4:33 PM, Blogger Moe said...

This comment has been removed by the author.

 
At 4/25/2012 5:54 PM, Blogger Benjamin said...

"fears about a shortage of refining capacity fade."---WSJ.

Really? When gasoline demand is much, much lower than recent years?

Gasoline demand is down more than 5 percent from last year, and last year was hardly a barnburner.

Gasoline stocks are reported high.

In 2008, oil prices rose even as oil tankers sat in Malta, full of oil they could not offload---nowhere to offload it. Eventually, prices cracked form $147 top $47. But the supply and demand did not seem to influence prices, except with serious lags.

 
At 4/25/2012 6:16 PM, Blogger Methinks said...

Oil tankers sat in 2008 because demand for oil tumbled as a result of the global recession. The spot price plummeted because refiners had plenty. They couldn't take more. Their storage tanks were full and they couldn't sell all that they were already producing.

However, you can't turn oil production off and on like a faucet. So, producers kept pumping oil, the refiners (knowing that they will eventually need more oil in the future) entered into futures and forward contracts. The oil for delivery against those futures and forwards was stored.

The demand for storage obviously increased exponentially as production continued in the face of a global drop in demand. And that's why oil sat in tankers and every other available storage facility.

 
At 4/25/2012 6:59 PM, Blogger Benjamin said...

Methinks-

A more plausible explanation is that speculators or manipulators pushed oil prices above the natural clearing price. They could do this for a while, as oil demand and supply are somewhat price-inelastic.

Remember, 80 percent of trades are made by people who are purely financial players, and are not hedging, ala airlines. The price set by the bulk of traders, not the minority (unless a determined minority act in collusion, a possibility).

A global recession cracked oil demand at the same time that higher prices began to switch off demand as well.

We are now again in a 2008-lite situation. The price of oil has been artificially high for a year or more, demand is waning, and at $100 a barrel, it makes sense to pump every last barrel.

I don't think oil can be sustained above $100 a barrel. People adapt, permanently lowering demand.

Sheesh Methanex can produce methanol at $1.34 a gallon.

The government needs to radically deregulate markets to allow alternative fuels such as natural gas and methanol, and eliminate the pink-o-socialist ethanol program.

 
At 4/25/2012 7:57 PM, Blogger Abir Mandal said...

Benjamin: It's obvious you know neither how speculators work, nor markets.

 
At 4/25/2012 8:00 PM, Blogger Methinks said...

Yeah. Sure, Bunny. The reason storage demand went up after the price of crude tanked is that "manipulators" were pushing up the price of crude.

That's a totally plausible explanation. If you're completely insane.

 
At 4/25/2012 8:31 PM, Blogger Benjamin said...

Abir-

Explain to us how the NYMEX works, a topic that has evidently flummoxed the St Louis Fed and former CFTC officials---are you sure you are better informed that there are? Are you an economist and professional trader?


Here is study by a Stanford University prof Kenneth J. Singleton, Adams Distinguished Professor of Management
Knight Management Center
Stanford University
Stanford, CA 94305
Email: kenneths@stanford.edu

if you get more right-wing than that. you wear a funny little mustache.

http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission26_091410-ata.pdf


So we have the St Louis Fed, Stanford profs and CFTC officials concluding that speculation has driven oil prices.

They may be wrong---but I would say the topic is controversial, and highly intelligent people disagree.

Of course, you have to highly intelligent to understand your opinion may not be fact. Are you that intelligent?

 
At 4/25/2012 10:18 PM, Blogger juandos said...

"So we have the St Louis Fed, Stanford profs and CFTC officials concluding that speculation has driven oil prices"...

Nice collection of socialist you rounded up there pseudo benny...

 
At 4/25/2012 10:36 PM, Blogger flipped54 said...

It is true that the same speculators that drove the price up artificially high are now bidding lower on futures. The point is that speculation drove the price up way too high...the price spikes caused by speculation are what hurts the consumer. Normal supply and demand without speculative manipulation would likely cause prices to be more stable and less hurtful to consumers. So this makes me think that those who use speculation to pull money out of the pockets of consumers are the ones who created speculation.

 
At 4/26/2012 6:21 AM, Blogger Methinks said...

This comment has been removed by the author.

 
At 4/26/2012 6:24 AM, Blogger Methinks said...

yeah, flipped, why allow gobs of research showing that futures markets dampen volatility to challenge your mere faith that they increase it?

Why even glance at Irwin and Saunders' graphs which show that futures contracts held by speculators DECLINED as the oil price rose?

Why follow the link to Jim Hamilton's paper to understand how the market arrives at the oil prices we observe?

Why follow the links to the papers Mark Perry provides the readers of this very blog?

Speculators are natural contrarians and that's makes them good for liquidity and helps dampen volatility.

But, please, don't let any of that nor the rest of the body of research stand in the way of blaming whatever you don't like on witches and evil genies.

 
At 4/26/2012 7:26 AM, Blogger Methinks said...

Bunny, did you actually read Singleton's piece?

How does he support his assertion that speculation is increasing volatility? Because in theory it could. Not a scrap of research about whether it does or not.

How does he support his assertion that passive investors are distorting the price? 'Cuz he says so.

The CFTC has spat out some research that contradicts Singleton, but Singleton dismisses it as IRONICALLY not precise enough - even though the CFTC used data that is finer than data available to Singleton. Which, of course, is not a big deal because Singleton didn't bother analyzing data in making sweeping assertions. Why complicate the issue with facts?? The co-integration of price is "no doubt" a function of index fund traders. No doubt? Really? Oil derivatives markets are so simple that there can be "no doubt" that a a change in single variable is driving the entire change in the market? And this is presented also without evidence. Furthermore, Singletom relies heavily on Mike Masters's assertions which are based on an extremely dirty data set which Lutz killian (whose paper is linked to by our host, Mark Perr) dealt with. There's more, but who has the time?

The paper was funded by the airline industry, which is (we are informed by Jet Beagle) trying to get the CFTC to clamp down on speculators. Normally, I don't subscribe to the idea that if something is industry funded it is necessarily biased. Industry is often just as interested in what's really happening as scientists and scientists are interested in protecting their reputation in the academy. However, that's not always true.

The airlines are the focus of anger by consumers who don't realize just how lucky they are to be able to crisscross the country in a matter of hours for a few hundred dollars - a trip that was, a mere hundred years ago, only a fantasy. Airlines need a scapegoat to deflect attention from themselves and speculators have are an age-old target.

Perhaps Jet Beagle will tell us that airline companies actually believe this nonsense. I'm not an insider in that industry, so my guess about their motives is mere speculation.

 
At 4/26/2012 9:15 AM, Blogger juandos said...

"The CFTC has spat out some research that contradicts Singleton, but Singleton dismisses it as IRONICALLY not precise enough - even though the CFTC used data that is finer than data available to Singleton"...

Well methinks I personally wonder if the CFTC numbers are any more valid than the numbers plucked out of thin air...

I know that the CFTC could have some real & verifiable data on hand but considering some of the other numbers spun by this administration (and maybe previous administrations?) I wonder if there are other indicators to validate CFTC reports/publications?

 
At 4/26/2012 9:30 AM, Blogger Methinks said...

Juandos, both the CFTC and the SEC are capable of some pretty good research - and they have access to data not publicly available. Why it's not publicly available is another sore topic.

Anyway, they do these studies to try to understand the effect of regulation. For instance, in 2007 the SEC got rid of the uptick rule because its research showed that the rule didn't do what it was supposed to do (basically, manipulate prices upward - whether or not that's a good idea is outside of the scope of this study) and that it served only to suck liquidity out of medium to low liquidity stocks. So, it did a lot of damage and it wasn't doing what it was intended to do - particularly in a market that now trades in pennies instead of fractions. In times when they are not under a lot of political pressure, the regulators will make adjustments in favour of a fair and orderly market, often based on research they conduct themselves.

Of course, the regulators are not truly independent. They must please their political overlords and cater to their politically connected members who would dearly love regulation that skews the field in their favour and take advantage of every crisis to lobby for such. So, when the political winds change, they start yapping about short sellers in equities and long speculators in commodities and publicly collaring and fining firms for normal activities, painting them in the media as manipulators or some other nonsense. the firms pay the fines to get the regulators off their backs because it's more expensive to win the fight than it is to just pay them to leave them alone. All firms pay fines every year. The regulators' bonuses depend on how many fines they bring in and since there are a ton of regulations on the books that are literally impossible to comply with, there is always something to fine firms for.

But, none of that means that all their research is bunk. Far from it.

 
At 4/26/2012 1:52 PM, Blogger bart said...

Benjamin said: Gasoline demand is down more than 5 percent from last year, and last year was hardly a barnburner.


Gasoline demand since 1983:

http://www.nowandfutures.com/images/retail_gas_deliveries.png

 

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