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  #21  
Old 06-21-2008, 01:27 PM
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  #22  
Old 06-21-2008, 07:17 PM
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The market should determine the price, not speculators. Fear and greed are the two things that cause most of the changes in commodity prices.
The thing is that the market is determining the price!

The thing that causes most of the changes in commodity prices is SUPPLY and DEMAND...not fear and greed!

Speculators actually serve to LOWER prices, despite all of the popular rhetoric out there today. In commodities markets, there are "natural longs", "natural shorts" and "speculators" (also called financial traders).

The "natural shorts", are those who seek to sell commodities that they produce. In the case of oil, primarily the oil companies. They do this so that they can lock in prices for future production, thus knowing their profit margins. they can also smooth out lumpy earnings in this fashion. By the way, the expected future price is the current spot price plus interest (or inflation) plus/minus dividends/costs - the actual future price can differ from this; however, cash and carry arbitrage are a powerful force that generally prevents much deviation from taking place.

The "natural longs", are those who seek to buy the commodity for their own use in business. In the case of oil, that would be refineries, the government for the strategic reserve, the army, industry etc.

When there is a mismatch between the timing and the amounts of oil available or desired at a specific date, this where speculators come in. They improve liquidity in the marketplace by buying on the contract dates where there is excess supply (and lower prices), and buy selling into other contract dates where the price is higher, thus making a profit. This activity, allows for LOWER costs for both the producers and the consumers.

Please understand, the vast MAJORITY of the "buys" and "sells" in the futures markets are executed buy industry participants. The speculators play a small but crucial role. Further, they have virtually no power when it comes to manipulating prices. They are just too small.

Finally, you say that the price is "artificially high", I say prices go up when demand grows and supply does not (which is what is actually going on here). By the way, the idea that all prices are based on costs is interesting: there are many who think that we do a very poor job of capturing the true costs when we price natural resources.

First of all natural resources are limited, this is not like manufacturing a widget. We should be capturing something with regards to cost of depleting the resources. Once it is used it is gone for ever. Also, we clearly do not do a good job of capturing the environmental costs of mining, the use of other resources in the process such as water and so on. There have been estimates that the true cost of a barrel of oil is between $400 and $500 if all of this is included.

In closing if you really want someone to blame for oil prices, you could make a better argument blaming easy money policies of the Fed for "artificially" fueling demand in the U.S. for years. Or that darned China for growing so much. Or, the decline rates of mature fields in U.S., Russia, Mexico, Venezuela and The North Sea. These forces dwarf traders in commodities pits....over and out !
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  #23  
Old 06-21-2008, 07:59 PM
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"selling into other contract dates where the price is higher, thus making a profit"

So, who's buying at the higher price? If the oil producers clamp down on the available supply, the price will go up, right? If they want to raise the selling price on a whim, they just make less available. That's the greed I'm referring to, since they really don't need to charge more.

One thing that can't be forgotten is that the dollar's value is hardly what it was. Many didn't take this into consideration when they complain about the price of gas. Last year, gas was averaging $2.99/gal and now it's about $4.07/gal. I haven't seen the actual number but IIRC, if the dollar hadn't fallen so much in the last year, gas would be about $3.39/gal.

The problem with our election process is that the yelling, screaming and finger pointing makes a good smoke screen for the real issues.
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Old 06-21-2008, 08:46 PM
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Quote:
Originally Posted by JimN View Post
"selling into other contract dates where the price is higher, thus making a profit"

So, who's buying at the higher price? If the oil producers clamp down on the available supply, the price will go up, right? If they want to raise the selling price on a whim, they just make less available. That's the greed I'm referring to, since they really don't need to charge more.

One thing that can't be forgotten is that the dollar's value is hardly what it was. Many didn't take this into consideration when they complain about the price of gas. Last year, gas was averaging $2.99/gal and now it's about $4.07/gal. I haven't seen the actual number but IIRC, if the dollar hadn't fallen so much in the last year, gas would be about $3.39/gal.

The problem with our election process is that the yelling, screaming and finger pointing makes a good smoke screen for the real issues.
I'm with you Jim.........but you can't win a debate against Jorski about the Oil Industry. He is "The Supreme Being" of oil. Jorski be thy name!?!?
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  #25  
Old 06-21-2008, 09:03 PM
Jorski Jorski is online now
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If the oil producers clamp down on the available supply, the price will go up, right? If they want to raise the selling price on a whim, they just make less available.
So you think that state owned oil companies, and private companies all over the world have colluded to limit supply? Funny, I know a lot of people in and outside of Calgary running flat out to supply every single barrel that they can.

If they have this desire to produce less, and can so easily increase the price at "a whim" - then why couldn't they limit supply and increase the price for thirty years ???
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  #26  
Old 06-21-2008, 10:04 PM
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"I know a lot of people in and outside of Calgary running flat out to supply every single barrel that they can."

They may be but I keep reading that the Saudis have cut back. Their supply isn't the same as in Calgary and there's no reason for it to be. Also, the US is Canada's main customer, right? IIRC, the US buys crude from Canada but we buy gas from other countries and sell diesel to them, which makes it a very complex issue.

"then why couldn't they limit supply and increase the price for thirty years ??? "

They could but even they don't want most of the world POd at them.

"So you think that state owned oil companies, and private companies all over the world have colluded to limit supply?"

And what is the effect of those oil companies colluding to limit supply? Everyone selling oil makes a lot more money. Why else would they make that arrangement, if not to increase their income? The Gulf suppliers hauled in about $2 Trillion in the last two months. The people you know are making more, too. If they aren't, they're not selling at market price.

Last edited by JimN; 06-21-2008 at 10:09 PM.
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  #27  
Old 06-21-2008, 11:10 PM
Jorski Jorski is online now
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The sad truth about the situation we all find ourselves in is that they are all pumping and selling as fast as they can.

The Saudis most likely are pumping just about as fast as they can. It's most likely that their production has peaked...just like the U.S, Britain, Russia, Venezuela, Mexico, Norway etc
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  #28  
Old 06-22-2008, 12:01 AM
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So the report I saw a few days ago that said the Saudis cut their production is wrong?
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  #29  
Old 06-22-2008, 08:12 AM
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I am sure that they did drop production; the question is why did they produce less. Their biggest field has been in production since the late 1940's. To get the oil out they pump in salt water from the ocean to push the oil to the surface.

The more they do this, and the harder they pump, the more they have to be concerned with collapse and instability of the chasm that holds the oil. A lot of geologists think that they have simply peaked inproduction and are managing their fields the best that they can in the face of ever increasing demand.

If they pump the fields too fast, they will bring up less total oil, not a good outcome either. The thing is, that no one knows for sure, as outsiders don't get access to the required geological information. That being said, there has been a lot of work done comparing their production profiles to what we know about decline rates in the rest of the world, and unfortunately it looks a lot like other fields in the world that are in decline.
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  #30  
Old 06-22-2008, 08:23 AM
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Saudi King says that speculators are to blame for oil prices. He also says that they are not maxed out on oil production and that they have increased production by 700,000 barrels a day in the last couple months and that they have more room to meet future demands. Here is the article.

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http://news.yahoo.com/s/ap/20080622/ap_on_re_mi_ea/saudi_oil_summit
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