article on gas and oil price drops

[sammyg2]

I'm not usually a cut and paste kind of guy, but this article gets pretty close to the truth.
It also states and 42% of people in US believe that Bush is orchestrating the recent price drops. Idiots.

Why gas prices dropped
Trust us. It wasn't OPEC or Republicans trying to influence midterm elections.
By Nelson D. Schwartz, Fortune senior writer
October 16 2006: 11:35 AM EDT


(Fortune Magazine) -- If the recent plunge in gas prices is the result of a conspiracy by President George W. Bush to help the Republicans retain control of Congress as 42 percent of Americans believe according to one Gallup poll, a lot of Wall Streeters wish they'd been in on the plot.

The end of oil's stunning ride
So what really drove prices down - if not an Oliver Stone-worthy scenario involving the Commander-in-Chief, the House of Saud and Secretary of the Treasury Hank Paulson cajoling his cronies at Goldman Sachs to sink the crude market?

By late summer, hedge funds and other investors had poured billions into long positions in oil, gasoline, natural gas and the rest of what traders call the "energy complex," all betting on a replay of the severe 2005 hurricane season that sent prices soaring in the wake of Katrina and Rita. But one day after oil reached a monthly high of $76.98 a barrel on Aug. 7, government meteorologists downgraded their hurricane forecast and cautioned that a repeat of 2005 was "unlikely."

That announcement, combined with the end of the summer driving season and a recalibration of the Goldman Sachs (Charts) commodity index that reduced the weighting of gasoline, prompted speculators to head for the exits even faster than they'd piled in.

The switch in Goldman's basket of commodities had been previously announced by the firm, but that didn't stop the conspiracy theorists. "Hmm, what a coincidence, luring Goldman's top dog to take a HUGE pay cut by becoming Treasury's top dog, and then Goldman Sachs makes this unexpected decision, serving to dramatically drive down gas prices," said the Grey Matter, a liberal blog. But the grassy-knoll crowd didn't bother to crunch the numbers.

According to Joel Fingerman of Chicago-based OilAnalytics.net, between the peak of $77 a barrel in August and the October low of just under $58, traders dumped nearly 40 million barrels (a 20 percent drop) from their long positions. The volatile gasoline market showed an even sharper decline - with traders cutting long positions from 32 million barrels in midsummer to just 1.7 million in October.

"Whatever you want to call it - speculators, fast money, hot money - a big part of the drop in crude that we've seen this year is because of selling by hedge funds," says Merrill Lynch technical analyst Mary Ann Bartels.

Betting billions on liquefied natural gas
That avalanche of cash also explains what's got the paranoid types talking - not merely the timing of the plunge in prices but its rapid speed. "Speculators create more velocity around existing trends," says Bartels. "Things are happening a lot more quickly in these markets than they used to."

The losers
Some traders were lucky and got out in time; most weren't. Implosions like the collapse of the $9.2 billion Amaranth fund seem spectacular, but the fund was merely caught in a bigger and badder bet than others hoping for another Katrina. Amaranth trader Brian Hunter bet the farm that hurricanes and a cold winter would push up natural gas prices, but, says Bartels, "a lot of people were caught by surprise."

The average energy hedge fund dropped 4 percent last month, according to Joel Schwab, a managing director of Hedgefund.net, which tracks fund performance. "They were having a great year, then things fell apart in September when they were caught long," says Schwab.

Even broader index-type funds that invest in a wide range of commodities and are open to individual investors are down. Manager John Brynjolfsson's Pimco Commodity Real Return fund is now off 5.6 percent for the year, after being up 1.4 percent before the summer rout.

The winners
One trader who's been luckier is Julian Barrowcliffe, manager of the $500 million Anglian Commodities fund. He has managed to eke out an 8 percent gain for the year by avoiding bets on which way crude would go, instead playing off the spreads between different products, betting on how, say, heating oil would move if gasoline prices went down.

"Anytime you have a big reversal, the guys who follow the trends get killed trying to get out quickly," says Barrowcliffe. As for those conspiracy theories, Barrowcliffe insists he wasn't tipped off. "It's ludicrous," he says. "Maybe 42 percent of Americans think Elvis is alive too."

Ironically, the current price for crude - $59 a barrel - is roughly where oil insiders have been predicting it would be if it weren't for all that hot money flowing into commodities. Last spring, energy consultant and Deloitte advisor Joe Stanislaw told Fortune that fundamental supply and demand factors suggested a price of about $50 a barrel, with geopolitical factors adding $10 and speculators putting another $10 on top of that.

Unfortunately for drivers, Stanislaw doesn't expect the premium caused by worries about tensions in key oil-producing countries like Iran, Iraq, Venezuela and Nigeria to fade anywhere near as quickly as all that hot money did. And there's no reason that money won't move back into energy if sentiment turns and there's a new trend to play.

Right now, the latest bet by traders is for a normal winter - if there's a sudden cold snap before Thanksgiving, expect a bump in crude. So enjoy the low gas prices while they last. You can be sure the White House will, even if it didn't orchestrate them.

[legion]

I love how the same people who think Bush is a bumbling idiot also think he the unseen master of oil market. Make up your minds people!

[Moneyguy1]

legion:

Bush is no fool. His "flaws" may include stubbornness and hubrus, but not stupidity. And, for the "Conspiracy Theorists" here, the White House could claim plausable deniability if the oil/gas industry did this on their own to help out the GOP in anticipation of future gains. (Not Likely).

[JSDSKI]

Bull*****. We went from paying $2 bucks a gallon to over $3.50 a gallon and back to $2.5 a gallon in less than a year and every oil company reported their highest profits ever simply because of speculation about hurricanes by a bunch of hedge fund managers? And it never happened before and now Fortune Magazine (which is like reading a Chamber of Commerce brochure) is promising it will never happen again?

Sorry, smells like Enron to me - "really, California is out of electricity- they have no more capacity - there will be brownouts for the forseeable future". On the other hand, if you give us a couple of billion dollars - we can fix this for you."

Gamed market.

[sammyg2]

Trolling for (fill in the blank), looks like we have a bite.

The white house can't control the oil price without legislation or foreign policy changes and everyone would know if they did that.
The oil companies want the price to be $10 a gallon, so saying they control the price is just dumb. If they could jack the price up they would take it much higher and never let it come back down, but it just doesn't work that way.

If you disagree, please provide a basis for your theory. Experience, evidence, etc.
i've spent the last 25 years studying the oil industry, investing in the oil industry, and much of the time working in the oil industry. I know how it works.
If it was 1/4 as dirty as some of you think it is, they would all have gone to jail many years ago.
I know it's fun for some to imagine it's all a conspiracy, but reality does not support that fantasy.

[JSDSKI]

I think it was gamed at the commodities broker level - not at the "industry" level. What proof do you have oil companies want $10 a barrel crude ? Aren't oil companies producers, refiners, distributors, and commodity brokers (BP, especially) ? Don't they make profit at each market point? Isn't that their goal ?

I don't believe in conspiracy any more than you. I do believe that oligarchic forces will naturally take economic advantage of their market position. And they will continue to do so until other market forces are introduced to balance their moves.

[Aurel]

To prove or disprove that there is a manipulation of the oil prices linked to the midterm elections is very simple: just wait and see where the prices go after the elections. We can keep the thread running till november...

Aurel

[Aurel]

Double post.

[kach22i]

Who is supplying the money behind some of the biggest speculators in the oil market?

Follow the money.

Oil companies play their own futures; it all may be very simple.

[TheMentat]

Originally posted by sammyg2

The oil companies want the price to be $10 a gallon, so saying they control the price is just dumb. If they could jack the price up they would take it much higher and never let it come back down, but it just doesn't work that way.

If you disagree, please provide a basis for your theory. Experience, evidence, etc.
i've spent the last 25 years studying the oil industry, investing in the oil industry, and much of the time working in the oil industry. I know how it works.

Why would oil companies want $10/gallon?

[sammyg2]

Oil companies are run by people who have to return a profit to the shareholders or they will soon be out of a job. Shareholders normally expect around a 10% profit or better.
Unfortunately, oil companies usually don't return that kind of profit, not even close. XOM hit that mark for part of last year but it is not sustainable.
On average over the past 10 years the ROI of an oil company is around 1 to 3%. You can do better in T-bills. That's partly why they are called grandmother stocks, stable, predictable, small return but small risk. Just what an old grandmother needs.
The oil company executives would love to get 10 or 15% ROI, but it just doesn't happen.
I pulled that $10 per gallon number out of my butt, it is figurative and suggests that the oil companies believe their product is grossly underpriced based on the cost vs. profit.
basically I was saying that they want the price to go much higher than it is or has been. If they had control of the price it would go much higher. Maybe not as high as $10, but who knows? We'll never find out.

Over the past two years lots of things changed as speculators jumped on the bandwagon. the more the price went up, the more that jumped into the sector.
Eventually it hit a peak due to higher than expected inventories, mild weather, and record refining production.
The speculators realized it had peaked and they started getting out. As they did the price dropped. The more it dropped the more they sold.
Eventually the opportunistic were weeded out and only the hardened oil speculators were left, the market will soon find stability again to a certain extent. That's basically where we are today.
Next spring the price of gas will go up to at least $2.60 IMO, and it may get as low as $2 this winter.
I expect it to follow that pattern for the next several years barring any unusual outside influences.
I would love to see the price go higher, $4 a gallon would make me very happy if I saw it coming soon enough to get back in this sector. Unfortunately I don't have any more influence on that price than others, including Bush.

[john70t]

I think Venezuelan President Hugo Chavez announced he was going to limit production to keep prices high.

The dip in prices may be a temporary thing, and we may have to radically restructure to compensate(30 years late), if we can.
Deficit is at an all-time high, consumers are stretched with 3rd HELOCs, and there's no new innovations such as cars or computers on the radar. Just in time for the Democrats to take over.

[gaijindabe]

Originally posted by john70t
I think Venezuelan President Hugo Chavez announced he was going to limit production to keep prices high.

Like he can afford to do that.

[JSDSKI]

Interesting ideas in this thread. Is it my imagination or didn't the oil companies have the most profitable years ever over the past couple of years? How does that tie in with such low "profits" unless mainstream media misreported the numbers? Anyway, the difference in this price cycle is that the oil companies are participating in the speculator-broker market. And they will continue to do so unless a new market force is introduced or commodity participation regulations are changed.

The advantage of higher prices ? Eventually it will lead to change in use - new technologies, different consumer behavior, new foriegn policy, new and different transportation models. Most of which is generally a good thing.

The disadvantage of higher prices? Absolutely kills the middle and lower class participation in consumer economy - too much money spent on transport and heating. All those profits get concentrated in one sector of economy (oil/energy) which reduces the effectiveness of re-investment of profits. That sector would naturally reinvest profits in capital projects that benefits them exclusively. Not generally good.

It will be interesting to see what happens with pricing over the next few months and years. Oil could gradually rise towards $80-100 a barrel over the decade - simply because of third world demand. The developed countries must push their products and services into the third world because the potential ROI is much higher than in "first world" countries. The financial markets will demand that kind of return and governments (taxpayers) will underwrite the risk. We may be in for a wild "mercantile" century like the 17th and 18th century's of expansion, exploration and colonization.

[speeder]

We are in for a century w/ twice as many people on the planet as last century, and a major era of taxes and non-abundance. Think sky-high taxes, unaffordable health care/insurance, unaffordable energy and housing, and lots of horrible wars. And it will be real crowded. Yeah, that sounds about right.

[gaijindabe]

Is this SoCal you are talking about?

[SlowToady]

Interesting ideas in this thread. Is it my imagination or didn't the oil companies have the most profitable years ever over the past couple of years? How does that tie in with such low "profits" unless mainstream media misreported the numbers?

I think sammy was talking about profit margin, ie, the profit margin shareholders want is 10%. You can still have low profit margin but big profit by...selling more.

So, no, it isn't your imagination, oil companies did report record profits but likely didn't have a 10 or 15% profit margin. IIRC, it was posted in some other long forgotten oil thread that MSFT had a higher profit margin than XOM, even though XOM posted a bigger profit.

Bull*****. We went from paying $2 bucks a gallon to over $3.50 a gallon and back to $2.5 a gallon in less than a year and every oil company reported their highest profits ever simply because of speculation about hurricanes by a bunch of hedge fund managers?

I think you're underestimating the power that hedge funds, especially lots of hedge funds all working the same angle, can have. Dot-com boom? Dot-com bust? In 1999 a hurricane in Japan put Barings Bank out of business (due to their market position via Nick Leeson). Hedge funds have a LOT of influence.

[BlueSkyJaunte]

Originally posted by TheMentat
Why would oil companies want $10/gallon?

No kidding; that statement is laughable.

Oil companies want gasoline prices to be just below the "discomfort level", which also happens to be pretty close to the price where alternative fuels, oil shale processing, et al begin to make financial sense.

[jkarolyi]

>>Is this SoCal you are talking about?

LOL

Do they not teach economics in high schools and college anymore? I've found that most libs and conspiracy theorists need to take an econ 101 course. Conspiracys are more interesting than hard numbers though I guess.

Read Sammy's article and learn.

[JSDSKI]

Originally posted by SlowToady
[B]Hedge funds have a LOT of influence.

You make my point. Oil/energy firms are speculating on their own product through funds and commodity brokers. Exactly like the dot.coms valuations were ramped up by IPO specialists and fund managers that were invested in the same dot.coms they were touting. Conspiracy? Nope. But, not exactly laissez-faire market forces, either.

If US oil firms didn't double or triple the number of gallons sold over the same time period how did profits go up so much when compared to "regular" years?

Nick Leeson was a crook who hid his losses from his superiors. The bank went bust because they let him go crazy on futures without supervision.