"The 15 percent drop in oil prices since the end of June was the longest and steepest decline so far in 2009. Prices had been rising since February, more than doubling from lows hit near $33,as traders started to price in an eventual recovery.
But many analysts cautioned prices had risen ahead of the real economy, with unemployment still climbing and global oil inventories mounting up.
The fragile state of the global economy dominated the annual G8 summit, with the United States, Japan, Germany, France, Britain, Italy, Canada and Russia acknowledging there were still significant risks to financial stability.
OPEC's 2009 World Oil Outlook has added to the gloom as it said world demand for oil may take years to recover from the slump in 2009 because of economic weakness and demand destruction." Reuters
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Does anyone here still think that crude oil prices are governed in today's markets by eventual world shortages?
I reckon that the time has come to provide an opportunity here for further debate on this question if there still is a question. pl
Let's start building the 19 new refineries that our U.S. needs for domestic consumption of gas/diesel. Those new refineries will go a long way towards relief upon the U.S. citizen's pocketbooks. It's not oil drilling that we need, it's the new production refineries.
Posted by: J | 10 July 2009 at 09:44 AM
It's always struck me as odd how crude prices are driven by the "price of the last barrel of oil traded" - huge numbers of contracts hinge on the price of a barrel of oil without actually participating in the market themselves. There are plenty of other methods to price oil - take gold markets for example where there is a "fix" - a committee of traders look at the day's trading and decide on the value of gold by eliminating outlier trades. See Gold Fix on Wikipedia for a brief overview. In any event, it just seems a bit silly to run the market to allow manipulation when other equally important markets have dealt with the issue for many years by developing oversight models to reduce it. It doesn't even have to be government run as the Gold Fix example shows.
Posted by: Jim | 10 July 2009 at 10:08 AM
Sunday I caught a little feature on the http://www.daserste.de/weltspiegel/beitrag_dyn~uid,k3xggnnb2k15tt3r~cm.asp>first public channel here in Germany.
I'll translate the text, notice Rotterdam is the biggest oil port in Europe:
They interviewed a couple of people in the business. It's rather expensive to keep the tankers there lying in wait for the oil price to rise. But if the price goes up it pays.
Again http://online.wsj.com/article/BT-CO-20090709-705989.html>Rotterdam heating oil storage for the http://www.portofrotterdam.com/en/news/pressreleases/2009/20090616_01.jsp>European Market.
Do I have to warn my parents to better order earlier? Considering what the price to have all these tankers in a standby position over a long time, they will make sure prices go up, no?
Posted by: LeaNder | 10 July 2009 at 10:14 AM
Demand Destruction. What a nice euphemism for hedge fund manipulation. I'll have to dig out my copy of Dr. Brigham's finance manual but I don't think 'demand destruction' is in there.
http://www.amazon.com/Fundamentals-Financial-Management-James-Horne/sim/0273685988/2
See what the Nobel Prize winning economist has to say:
http://krugman.blogs.nytimes.com/2009/07/08/oil-speculation/
Posted by: Fred | 10 July 2009 at 10:17 AM
Behind the rise was a large element of speculation, sitting on top of unrealistic anticipations of a rapid economic recovery, which in turn were associated with a propensity greatly to exaggerate the likelihood of the very loose monetary policies adopted to combat the economic crisis producing a rapid rise in inflation.
The euphoria is now turning sour. As the economist Nouriel Roubini, one of the few to anticipate the current crisis reasonably accurately, recently noted, the 'spring green shoots' about which there was so much optimism not long ago are turning into 'summer yellow weeds', which may actually turn into 'brown manure' by the end of next year.
(See http://www.rgemonitor.com/roubini-monitor/257242/new_monthly_roubini_column_for_project_syndicate.)
The basic underlying fact behind all this is the easy money policies which have been pursued by central bankers since the late Nineties -- with Alan Greenspan in the lead. The world of serial bubbles that resulted created enormous incentives for financial institutions to practice momentum investing.
In the aggregate, investors will lose in bubbles. But those who can judge which way the herd is moving, and in particular anticipate sharp changes of direction, will make money -- particularly if they can find ways of influencing the behaviour of the herd. The financial sector then ceases to be a mechanism for the effective allocation of resources, and becomes a casino. All too often, investment professionals who try to stick by more traditional approaches end up with no clients.
The German magazine Der Spiegel has a fascinating and very readable discussion of all this in a profile of one the former chief economist of the Bank for International Settlements, William White, who tried valiantly and unavailingly to prevent Greenspan's debauching of the global financial system.
(See http://www.spiegel.de/international/business/0,1518,635051,00.html.)
Posted by: David Habakkuk | 10 July 2009 at 11:17 AM
May I refer you to the Matt Taibbi piece in Rolling Stone ?? - it seems as tho our military ethics are of better quality than those of our bankers .
ns
Posted by: nita scott | 10 July 2009 at 01:16 PM
I think the word you're really looking for is "speculators", not "investors."
Posted by: Helena Cobban | 10 July 2009 at 02:02 PM
PL, I think the simple answer to your question is no, they're not.
That said, the growing perception that supply problems are a very real possibility in the foreseeable future is now a constant backdrop against which oil markets trade. It's one of the contributors to the extreme volatility over the last few years. The current worldwide slowdown has changed an extremely tight real world market into one burdened by uncomfortably large short-term oversupply, but I suspect most players are still at some level attempting to adjust to the idea of peak oil being just around the corner.
I don't think there's much doubt that investors/speculators are playing a larger role in the energy markets than ever before. This decade saw an almost entirely new and very substantial move by institutional money into commodities in general, and energy in particular. Still, any given increase in investor funds devoted to commodities has a one-time effect; for investor money to continue pushing prices there must also be a continuing fresh inflow of funds. If anything, I'd guess net investor exposure reduced through late 2008/early 2009 (contributing to the price slide) and has probably picked up a bit again recently.
In any case, I don't see how the markets can be anything other than somewhat schizophrenic at the moment; after all, they are in essence a reflection of the prevailing mood. With unprecedented swings in economic activity worldwide and very high levels of uncertainty about what's coming next, very sharp moves are unavoidable.
As an aside, Fred provided a link to a recent Krugman piece on oil speculation. I hadn't seen it previously and wonder if Krugman has thought things through properly. He cites the absence of inventory buildup last year as part of why he was sceptical that speculation was a primary driver of the price rise then; on the other hand, he now points to the bulging inventory levels as definitive proof that speculation is at fault (i.e. hoarding).
I don't think either in itself says much about the role of speculation, one way or the other. Last year, inventories were low primarily because demand was sucking oil out of the whole supply and storage pipeline as fast as it could be put in. Now, by contrast, the demand destruction resulting from the economic downturn (together with an aggregate unwillingness by producers to cut back enough to match the lowered demand) has led to a critical short-term oversupply and hence the bulging inventories.
(As for the tankers looming offshore, to the extent that oil producers won't cut back enough to match reduced demand, the oil has to be stored somewhere. No doubt plenty of trading firms are participating in that market, in large part because the contango has been so steep and hence potentially profitable. Still, if they didn't step up, I guess someone else would have to.)
So, as I see it, while speculators and investors are almost certainly still playing a significant role, I doubt whether it's anywhere near dominant. In the spectacular run-up mid last year, though, I do think they (perhaps substantially) contributed to a kind of perfect storm in the energy markets when their one-sided influence was added to genuine supply constraints, surging demand (in particular from China) and a widespread commodity boom with all the attendant mass psychology.
Finally, let's not forget that producer and user decisions on whether to hedge are also in effect speculative and are probably at times a much larger swing factor than investors or traders.
It's a complex picture, and I don't think it's going to get simpler any time soon.
P.S. David, I also thought the Der Spiegel piece was very good. It shows so clearly the difficulties in battling a strongly entrenched prevailing paradigm, even when the individuals and institutions concerned are meant to be able to stand above the fray.
As you said, easy money policies were pursued by most central banks, but their efforts were only part of a financial structure that (as the result of increasing deregulation from the 1980s onwards) was keyed towards exponential expansion in credit. As often as not, central banks really only validated existing growth in credit by expanding the money base to roughly match (curiously enough, the most active central bank contributor to worldwide monetary growth was probably the People's Bank of China).
Of course, central banks had another, vital, enabling role: together with sundry government guarantees (both implicit and explicit), their general "reassuring" presence and supportive interventions powerfully contributed to an entirely unjustified level of confidence.
P.P.S. Jim, I'm not sure the Gold Fix constitutes an oversight model. It may be better characterised as the means by which the major players gather together twice a day to enable large real business to be done without unduly batting around the intraday markets. As you note, it also produces a daily benchmark price that is used for gold business which isn't unduly price sensitive.
Posted by: Ingolf | 12 July 2009 at 05:42 AM
OPEC and the other NOCs (national oil companies) watch US and emerging markets consumptions rates closely. So closely is this figure watched that the US does not really watch it at all but relies on the domestic energy industry for all the critical numbers. API (American Petroleum Institute) and other organizations that smooth the business in violation of anti-trust legal concepts even with the blessing of Uncle Sugar means that no one in US really knows exactly what is what with respect to oil
So what to do? Well watch as percentage of total reserves worldwide gradually fall to the NOCs and the domestic energy producers are squeezed out. Long term realignment of business plans by Exxon, and others. Don't judge by current market since it is unpredictable. But hey demand is down and prices are down. This may save the airlines but probably no one else from the economic collpase.
Posted by: William R. Cumming | 12 July 2009 at 10:30 AM
Oil price is being manipulated
anyway, more importantly, the dollar itself is increasingly looking shaky. The 90's recession was partially bailed out by the Japanese. They bought gigantic amount of dollar which in turned paying US deficit.
So, now both china and japan want out. .. this ought to be interesting in the next 3-4 yrs. (forget oil price. if dollar swings wildly, nobody can price anything. then it will truly be "world market deciding things.)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ.CUWH3_7o8
“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”
The DPJ overtook Prime Minister Taro Aso’s Liberal Democratic Party to become the biggest party in Tokyo’s city assembly in elections yesterday, less than two months before national polls must be called. Nakagawa’s views contrast with those of the LDP, which favors buying U.S. government debt.
Finance Minister Kaoru Yosano last month said his trust in Treasuries was “unshakable.” Japanese investors are the biggest foreign holders of Treasuries after China with $685.9 billion of the securities in April, according to the U.S. Treasury Department.
Posted by: curious | 12 July 2009 at 09:56 PM
Ingolf: I agree - there's oversight and then there's "oversight". I would argue that the problem is speculators trying to jam the price of oil upwards - the Gold Fix model provides oversight in the sense of market players looking at the totality of trading to figure out what the price should be, rather than simply looking to the last trade. It is definitely not "oversight" of the kind that the SEC provides for example.
Posted by: Jim | 13 July 2009 at 12:19 PM
Understood, Jim. I don't know, though, how realistic it is to say speculators are trying to jam the price of oil upwards. Institutional investors certainly concentrate mostly on the long side but as a rule they're not so much trying to influence the price as simply diversifying into what seemed (and perhaps still seems) an attractive area. As for more active traders, some of which will be institutions, at times they undoubtedly try to bully the market, but, they'll be on whichever side seems to offer the best risk/reward. From last July to this February (when prices fell by almost 80%), for example, I'm pretty sure quite a few of them would have been aggressively playing the bear side.
With gold, the Fix rarely diverges much from the general market trading which precedes and follows it. In that sense, gold trades very much like any other market.
In a more general sense, I know lots of people are unhappy with the notion, but it seems to me the "last trade" in any market is in fact the participants' collective best attempt at determining what the price should be. Sometimes it will been bullied in one direction or another, but any player trying to "manipulate" a market faces the challenge of getting out of the play profitably; other aggressive traders may well sense vulnerability and therefore take the other side. Equally, markets at times end up reflecting widely held delusions which will of course seem ridiculous with the benefit of hindsight.
It's far from perfect (to put it mildly!), but I struggle to see a more effective alternative. Bit like Churchill's comment on democracy perhaps: "It's the worst possible form of government . . . . . except for all the others."
Posted by: Ingolf | 13 July 2009 at 07:09 PM
oil and gold.
http://www.businessinsider.com/the-price-of-oil-is-quietly-creeping-back-up-2009-7
After bottoming out on July 13th, the price of oil has quietly risen in the past two weeks. Today the price of a barrel closed at $67.16.
Just like the oil rally earlier this year, it's got analysts that believe in the "fundamentals" of oil scratching their heads. Yes, we still have a big glut of oil. Nope, demand hasn't really improved. But, once again green shoots this time in the form of earnings that aren't catastrophic, investors are betting demand will bounce back.
Posted by: curious | 24 July 2009 at 02:19 AM
Yeah well. ...duh?
next: stop pissing off OPEC with that Israel thing. It's why oil is at $70 instead of $30.
http://www.dailykos.com/storyonly/2009/7/29/759398/-CFTC-Verifies-Taibbi-Charges:-Wall-St.-Caused-08-Oil-$-Spike
CFTC Verifies Taibbi Charges: Wall St. Caused '08 Oil $ Spike
CFTC: Speculators caused 2008 oil price crisis
By Daniel Tencer
Published: July 28, 2009
In a major U-turn from its claims during the Bush administration, the Commodity Futures Trading Commission is now set to admit that speculation in oil markets -- and not the forces of supply and demand -- are behind last year's massive oil price spike.
In the summer of 2008, oil prices on the open market reached an unprecedented $147 per barrel. Many economists argue the spike helped push the US into an economic free-fall last autumn.
At the time, the CFTC -- which is tasked with regulating commodity and financial futures -- said that the huge price spike was a result of supply and demand. That explanation was met with ridicule from many market-watchers, who said it was impossible that demand for oil increased by such a huge margin even as the North American, European and Japanese economies were slowing down.
Now, according to a scoop in the Wall Street Journal, the CFTC is about to reverse its Bush-era position, and admit that market speculators -- investors who bought oil futures on the expectation they would rise in value -- "played a significant role" in the oil spike.
Posted by: curious | 29 July 2009 at 06:36 PM
Posted by: sshervais | 27 August 2009 at 02:12 PM