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2008-05-22 -Signs, Portents, and the Weather-

OPEC unhappy with oil price surge Honest, Really, Way, Trust Me

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Posted by GolfBravoUSMC 2008-05-22 17:53|| || Front Page|| [9 views ] Top

#1 It is my understanding that the oil producing countries don't sell oil at the daily spot price. That price is obtained on the secondary market. OPEC producers negotiate their prices on longer term contracts for huge volumes. The oil they are pumping today was probably "sold" last year or at least a couple of quarters ago.

So what happens when prices spike like this is that demand drops and so they are now finding trouble getting buyers for all of their oil because the people who bought their oil yesterday are seeing the demand for it go down and they don't need as much as storage stocks are high.

Badri is correct. What is driving the spot market price so high is speculation and the weak dollar.

U.S. commercial crude oil inventories decreased by 5.4 million barrels from the previous week, according to the Energy Information Agency's (EIA) weekly report. Analysts had expected a modest increase. Motor gasoline inventories decreased by 800,000 barrels last week. Inventories include product being stored in the U.S. by refineries, terminals' storage locations, and pipelines.

Doug MacIntyre, senior oil market analyst at the EIA, says the inventory numbers shrank because imports were down this week. Crude oil imports fell 7% to 9.24 million barrels a day, the EIA report showed. Imports have averaged 9.86 million barrels a day so far this year, down 0.9% from the same period last year.

So inventories were down in the US but because we are seeing a dropping of crude imports. The OPEC producers are not happy about that. Besides, it would benefit an oil company now to take the oil it just bought from OPEC for less than $100 and put it on the spot market for $135 rather than turn it to gasoline where there is minimal profit margin.

The bubble bursts when someone is left "holding the bag". Once the price stops going up, everyone realizes they are holding WAY overpriced oil and now they are all in a panic to unload it before the contract expires and they are forced to take delivery. That is how you turn oil into blood.

Posted by crosspatch 2008-05-22 19:14|| 2008-05-22 19:14|| Front Page Top

#2 Here ya go:

http://www.forbes.com/reuters/feeds/reuters/2008/05/21/2008-05-21T103522Z_01_L21676420_RTRIDST_0_OPEC-OUTPUT-UPDATE-2.html

The thing isn't supply/demand. What it mainly is, is traders. They see a market rising. Say oil is up. So it attracts more money to that market which pushes oil up even more. You buy oil at, say, $100 on the market with the expectation that you will be able to sell it for more before the contract expires and you are forced to take delivery. You don't really intend to take delivery, you are just betting that the price will go up and you will be able to unload it before then at a profit.

The problem comes in when the contracts that the market is bidding on are about to close. Anyone holding a contract after the closing date is responsible for taking or arranging delivery of that oil. Basically it turns from a paper contract to real oil. As the contract nears expiration, you are REALLY needing to unload that contract because you look in your back yard and don't see anyplace to put 1000 barrels of oil. Now you NEED to unload it and the price begins to fall as everyone starts unloading theirs too and the bubble begins to burst. None of the speculators really want to be stuck holding real oil and so they are all heading for the exits trying not to be left holding the bag and the market corrects (usually over-correcting at first) to a real value price for the product. Then those who were burned are reluctant to get back in that market and the people who really need to buy oil are left and supply/demand again becomes the dominant mechanism.

Sort of like how feeding frenzies can run gold up really quick or any other commodity.

Posted by crosspatch 2008-05-22 22:22|| 2008-05-22 22:22|| Front Page Top

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