Martha, you work in the energy industry. Tell us about the cost of oil, all the factors that go into it and how the price of oil compares with natural gas. Please???

 

Wow, that's a tall order. For some time, natural gas prices have been disconnected from the price of oil & products. Natural gas has been relatively flat compared to everything else. The price of oil has little (nothing?) to do with its actual cost of production and for some time little to do with actual supply/demand fundamentals for that matter. While there is obviously some connect between price and s/d sporadically, for some time, the most influence has come from the Wall Street refiners (hedge funds), barring any particular world event(s). You get a blip on the screen (up or down) every Wednesday morning when inventory stats are released and if some geo-political event occurs (rebels blowing up pipelines, etc), but for the most part the guidance you want is in the heads of the hedge fund managers. Having said that, demand has been strong in the Far East, and South America and the dollar is weak making foreign entities demand more dollars for each barrel of crude. This combined to drive the price to the $100 mark just as the current perception of the impending economic demise of the U.S. and subsequently other areas is helping to edge the price back down. I wish I had all of the answers.

There is one interesting thing (at least to me) that most people didn't see that will be a little footnote in the history books of the industry someday. The first day crude traded $100/bbl was only for 1 contract on NYMEX (1,000 bbl). The market was actually $99.60 and a local on the floor wanted to be the first human to trade $100 oil so he bought 1 contract. It basically cost him $400 total to have a nice piece of paper saying he was the first. I think I would have paid that much for that "honor".

 

THANKS! That's what I call information. The relationship between the weakening dollar and the price makes perfect sense. Is it fair to say that most of the recent "run up" in price is just a reflection of the fall of the dollar on the international market, or is there also some increase when we correct for deflation?

Please tell us why it is that the hedge funds have more control over the price than the producers. It seems to me that if there is competiton from other countries that the producers would be able to use that to their advantage and better control the price themselves.

 

My original post was a drastic over-simplification. The producers do have some control over price by decreasing or increasing production levels obviously. There is a fine line they walk -- they love the higher prices as long as they don't stay so high as to encourage new drilling, etc. For the time being, OPEC is happy to leave production levels where they are. Of course there is a LOT of non-OPEC oil, but OPEC gets the headlines.

Despite what your crude or products cost to produce, you're not going to sell them for anything below the current market and leave profit on the table. The funds started getting heavy into commodities several years ago. A lot lost their a$$ on natural gas -- not enough movement and not enough opportunity to influence that price. On the crude side, volumes traded on NYMEX are so huge, they had a better chance. Most of them watch technical indicators and since they all watch the same (multiple) indicators, they can easily become self-fulfilling prophesies.

If you watch the Commitment of Traders reports published by the CFTC, you'll see that non-commercial (hedge funds, etc) accounts will be totally off-balance with commercial (industry). A month or so ago (time relativity escapes me), the non-commercials were holding a LOT more length than the commercials while the commercials were holding a LOT more short positions than the non-commercials. With the price movement the past few weeks, it would appear the non-commercials won again. I need to look at a new report to see which side is where now.

Other factors that impact prices, though usually on a very short term basis, are any refinery problems, production problems as already mentioned, fear of escalation of the ME war and closure of the Straits of Hormuz, etc etc etc. Any given day it's an absolute coin toss.

 

Isn't the sun still priced at zero and not yet controlled by any radicals or religious wackjobs?

 

^^^ As far as I know they haven't managed to lay claim to it or tax it yet. We should really be doing more toward solar energy in my mind, along with a lot of other alternative energy work. However, I think ethanol is one of the stupidest and most misguided ideas we've come up with. It's a stop-gap measure at best and is going to prove to be a VERY expensive fiasco IMHO. I've never been a big proponent of nukes, but I'm beginning to think we need to go that direction as well. Whatever we do, we absolutely have to move faster away from the dead dinosaurs as our primary fuel and feedstock.

 

I don't know though, OR, there may be some solar worshippers out there who'd raise a bit of a stink.

 

Only about 10% (gove or take a few) of the volume traded on the NYMEX is actually physical oil; the rest is derivatives and paper contracts. That's why the hedge funds and investment banks have a greater influence: they are more likely to trade on sentiment instead of fundamentals, and the shear volume will amplify any market swings.

 

I try to monitor the wholesale price of gasoline, being that these oil purchases are so far in advance of delivery. Any merit in that?

 

^^ That's a very good point I should have mentioned. US crude production last week averaged 5.013 million barrels per day. We imported 10.363 million barrels per day, so total US supply of crude into refineries was 15.376 million barrels per day. The total volume of crude traded on NYMEX yesterday was 353,599,000 barrels. Simple arithmetic tells you that 338,223,000 barrels, or about 22 times production & imports, was pure speculation.