Oil inventories at 5-year high...why the spike in oil prices?

[jkarolyi]

BP has a problem with a pipeline...and this sends oil prices soaring in the futures market. Yet, as reported on CNN:

"Victor Shum, an energy analyst with Purvin & Gertz in Singapore, noted U.S. crude inventories are at a 5-year high.

"But the market is in very high anxiety, so a real disruption affects the prices, even if there is no threat of a supply shortage," Shum said.

Sounds to me like the market is entirely driven by specualtors, similar to real estate is being driven by the notion that "They're not making any real estate anymore!".

Could someone explain the oil futures market for me? I always though that oil futures were contracts to buy oil at a given price at some time in the future. But why does this affect the price of oil (and in turn gasoline) today? Traditional supply and demand would have oil prices at 5-year lows right now, not 5-year highs.

So who is buying all this high-priced oil, and where is it going? Are there giant oil tanks being filled up somewhere hoarding all this oil?

[1967 R50/2]

I think you pretty much nailed it for yourself. It's speculation and fear of disruption of FUTURE supply...not current supply. Just like the price of a stock represents speculation on the value of the FUTURE dividend streams or capital appreciation.

Other than that I will add:

1. Opec is a cartel, yes...but not a very effective one. DeBeers. Now THAT is a cartel. They take crappy little rocks, which are way more common than other gems like rubies, emeralds, etc, but by controlling the supply and cleverly marketing the product, create price demand which is over the top. Even at their worst, OPEC has never been able to exercise this level of control. There are too many sources outside the cartel...like Russia, Mexico, Canada, the UK (north sea) and the US.

2. There is no conspiracy to create high oil prices. If that were the case, Hugo Chavez, Nigerian rebels, BP, Iran, Al Qaeda, Vladimir Putin, Exxon, Detroit and every American consumer would have to be in on it. As much as we'd like to think that's the case, it is impossible.

If we don't like high oil prices, the solution is the same as it ever was: Sell the Porsche or SUV and buy a Prius or other fuel efficient car.

[Porsche-O-Phile]

They shut down the Alaska pipeline today - I'm sure that has a lot to do with it.

They'll use this (8% reduction in supply) to justify about a 20% hike in prices for several months (probably several months AFTER the pipeline is repaired and back in full operation), then lower prices 5% and the stupid public-at-large will go gaga over it thinking the oil companies have somehow done them a favor. . .

[arcsine]

Oil inventories at 5-year high...why the spike in oil prices?

Because the oil companies can and are shameless.

As much as we would like otherwise, the ONLY way to influence pricing is to stop using the product. Yelling about it will only fall on deaf ears. The best you can do for the next 10+ years is buy oil stocks. This is only the tip of the iceberg.

[pwd72s]

Well, let's see now...you're a small town retailer. That is, if there are any left that Wal-Mart hasn't killed off. You are quite happy selling widgets a a low 5% markup, at $1 each, That because the town folks are buying LOTS of widgets. Suddenly you discover that any future widgets you buy to replenish stock will cost YOU $1.30 each. You have a large stockpile in inventory, so of course you'll continue to sell your widgets for $1 each....right???

[jkarolyi]

I usually don't buy the oil company conspiracy theories...is there no economic explanation of why the laws of suppy and demand aren't working to bring down prices? Common sense would tell me that if my oil tanks were full, I need to start lowering my price to move inventory.

[gaijindabe]

Originally posted by jkarolyi
I usually don't buy the oil company conspiracy theories...is there no economic explanation of why the laws of suppy and demand aren't working to bring down prices? Common sense would tell me that if my oil tanks were full, I need to start lowering my price to move inventory.

"But the market is in very high anxiety, so a real disruption affects the prices, even if there is no threat of a supply shortage," Shum said.

[turbo6bar]

Corporate profits are pushing highs as a percentage of GDP, yet the market has taken a haircut. Reality and perception cause market fluctuations. It's easy to sit back when you're on the good side of a trade, but not so easy when you're on the bad side. C'est la vie.

I do not hold any positions in energy, but if worldwide liquidity does not take a dump this year, I'll jump right in.

[1967 R50/2]

Originally posted by jkarolyi
Common sense would tell me that if my oil tanks were full, I need to start lowering my price to move inventory.

Why? Demand drives the price as much as the supply...and demand for oil is very high.

You are selling Porsches. It's a pretty constant business but demand lately has gone up and the factory really can't build anymore than they are. Maybe they will build additional production capacity, but that is going to take a while and they are having problem finding a place for the plant. Your instinct tells you that the supply of Porsche's will only get tighter because demand will continue to grow while supply will not improve.

So, even though the lot is full today, are you going to lower your asking prices to clear out the lot? Probably not because you think you will be able to ask a premium tomorrow. In fact, if you are quick about it, maybe you can snap up some Porsches from other dealers TODAY and make even more money TOMORROW.

That's what speculation and futures contracts are about: How much is going to cost TOMORROW.

That's the idea.

[legion]

What is the typical length of an oil futures contract? That's about the time I'd expect to see prices fall.

Then again, I think prices should be falling now, but a lot of refineries seem to be shut down at the peak of summer (restrict supply?) and now we have a pipeline down...

[RickM]

Originally posted by legion
Then again, I think prices should be falling now, but a lot of refineries seem to be shut down at the peak of summer (restrict supply?) and now we have a pipeline down...

Just add a hurricane or two (or the threat alone), place in the right area and we're @ $5.00 PG.

[on-ramp]

the oil companies and the US gov'ment are in bed together. There's your answer.

[jkarolyi]

"1967 R50/2", thanks for your Porsche metaphor...made this a little clearer for me. Let's take it further.

Your Porsche dealer is located in downtown LA and only has so many parking places. Your lot is full, and you have more cars coming in. You need to lower prices to move your inventory, or lease a lot out here in the IE to hoard Porsches.

I haven't seen any oil tank farms popping up around the country...has anyone else? Are companies really hoarding oil? If all oil is purchased through futures (is it?), then that explains the huge price spike as speculators outbid the oil companies for them. Isn't most oil purchased immediately at the market price or is all oil purchased through futures contracts?

[Mike Feinstein]

There's one fact that seems to be overlooked in all the gas-price threads (that I've read). That fact is:

We have no options as consumers. Gas is a necessity in our society. Unless we quit our jobs, pull our kids out of schools, and live like hermits, we HAVE to buy fuel....just like we have to buy food. Our society is so intertwined with the consumption of fuel (boats, motorcycles, jet ski's, ATV's, cars, airplanes, etc.) that we have no choice but to live without other things so we can buy gas. Yes, we can sell our Porsche's and pickups at a huge loss and buy micro-econoboxes, but in doing so we accomplish nothing more that reducing the safety of our families as they efficiently burn fuel in the course of normal life.

My 6 year old could be the CEO of Exxon (I wish) and the company would still make billions. It doesn't take special talent to make a profit in an industry with a captive market and complete price control. Put Exxon's CEO in charge of a company where the public actually has a choice, and it's a whole new ball game.

It ain't right.

[1967 R50/2]

Originally posted by Mike Feinstein

My 6 year old could be the CEO of Exxon (I wish) and the company would still make billions. It doesn't take special talent to make a profit in an industry with a captive market and complete price control. Put Exxon's CEO in charge of a company where the public actually has a choice, and it's a whole new ball game.

Not so. Exxon is not a monopoly, say oh, like the cable companies, power company and the phone company. With those, you've got no choice. If you live in their area you buy their service.

Exxon has competition from other oil companies. Don't like Exxon's policies in Alaska or elsewhere? You can buy your gas someplace else. For example, I will never buy gas at Citgo....it's an outgrowth of the Venezuelan government.

Point is, even with a commodity like oil, it still takes a fair amount of acumen to market your product and avoid political risk (Venezuela, Nigeria, Ecuador, Bolivia which recently nationalized) natural disasters (gulf of Mexico) and environmental boycott.(Valdez).

Quite frankly, even if the oil companies were helmed by your 6-year old, I wouldn't have a problem with them making money. It's the capitalist way. I am also confident that if oil gets TOO expensive, substitutes or new sources will be developed. That has been the way with every commodity known to man...ever!

Spices were in short supply, so Vasco De Gama developed a new trade route to Goa.

Whales were in short supply, so we figured out how to crack mineral oil.

Copper cable was getting expensive so someone came up with fiber optics.

Couldn't get to the rubber trees...so somebody invented Butyl Rubber.

The list goes on....

[Chocaholic]

Originally posted by 1967 R50/2
Spices were in short supply, so Vasco De Gama developed a new trade route to Goa.

Whales were in short supply, so we figured out how to crack mineral oil.

Copper cable was getting expensive so someone came up with fiber optics.

Couldn't get to the rubber trees...so somebody invented Butyl Rubber.

Ah, but I'm guessing the Spice, Whale, Copper, and Rubber lobbyists in Washington couldn't hold a candle to our band of honest oil competitors. Can you say "legalized price-fixing"?

[jyl]

Originally posted by jkarolyi
[BI haven't seen any oil tank farms popping up around the country...has anyone else? Are companies really hoarding oil?[/B]

Oil is a global market, you have to look beyond US borders and US inventory data.

The world's oil producers have appx 2MM bbl/day spare capacity but today it is about 1MM bbl/day (interruption in 650K bbl/day Nigeria and 400K bbl/day BP).

Increased uncertainty over the reliability of oil supply makes many countries want to hold larger inventories. Filling these inventories could be incrasing demand.

For example, China is building a strategic oil reserve to hold 10 days supply, to get the country up to 30 days' total inventory in storage. (The US has 160 days, Japan 160, Germany 130.) China consumes 7MM bbl of oil per day.) 10 days is 70MM bbl, or 70 days of the world's current spare capacity.

This is just one example, I don't know how the overall numbers look, but the point is that looking simply at US oil inventories is probably an outdated approach.

[1967 R50/2]

Originally posted by Chocaholic
Ah, but I'm guessing the Spice, Whale, Copper, and Rubber lobbyists in Washington couldn't hold a candle to our band of honest oil competitors. Can you say "legalized price-fixing"?

Everytime oil prices spike, people bring up price fixing...every time it is investigated and everytime there is never any evidence of it. That's because there is nothing to it. Even Nader and Michael Moore don't pay it any attention.

...and you pick this as your first post????

[techweenie]

Originally posted by 1967 R50/2
Everytime oil prices spike, people bring up price fixing...every time it is investigated and everytime there is never any evidence of it. That's because there is nothing to it. Even Nader and Michael Moore don't pay it any attention.

...and you pick this as your first post????

OPEC is nothing if not a pice-fixing cartel.

The oil refiners have consumers programmed to accept increases on already delivered gasoline based on events far up the supply chain.

The short term price increases go right to the bottom line.

What possible incentive would the refiners have to adjust their pricing to reflect actual rather than anticipated costs, if their market just adapts without a whimper? (well, maybe with a whimper, but nothing effective)

[turbo6bar]

The talk of nationalizing natural resources also adds to the equation. This may reduce availability of oil.

As long as countries continue to increase monetary supply at double digit rates, and developing countries continue rapid growth rates, the demand side will be strong.