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Old 05-09-2008, 10:06 AM
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Lightbulb Gas & Oil Prices in 2008 and the near future...

So I haven't really found many articles in the news about why gas prices are where they are and the articles I have found are not really all that informant or really old. Either way I have found an interesting article on CNN that brought up both sides of the equation, the supply side and the demand side. Now it's opinions of people in the industry which is not always 100% but specifically I pulled this out of the article to share.

From: Why $120 oil is good
Quote:
The problem, he says, is new discoveries of crude in non-OPEC areas like the United States, the North Sea, and Russia have not kept pace with the oil being removed from those places. OPEC, which holds two thirds of the world's crude oil reserves, has seen no drop in global demand despite $120 oil and has little incentive to increase output.

It's this supply problem that prompted analysts at Goldman Sachs to reaffirm their prediction of a so-called "super spike" in oil prices - which could usher in $200-a-barrel crude in the next 6 to 24 months.

"We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent," Goldman analysts wrote in a research note Tuesday.

That's the supply side of the equation. The demand side is a familiar story - developing regions like China, India and the Middle East are using more and more oil. It's not that this wasn't known last year - when oil was half as expensive as it is now - it's just that the world is moving closer to that tipping point where demand will exceed supply.
The problem is who do you believe? In that same article you get mixed opinions of course like...
Quote:
"I think the market is totally insane," said Fadel Gheit, a senior energy analyst at the investment firm Oppenheimer. "Somebody is playing a game, and we're all paying for it."
I too for a while thought that someone got mad, or decided one day to start jacking the prices just to watch the ripple effect. Now I am thinking I should buy a barrel of oil @ $120 and sell it in 6-months for $200 (Not literally).

If you ask me and I was big oil, I don't think I would be jacking up the prices because we are running out to promote alternative fuel source's unless my company was the one coming up with the alternative fuel source because my company would be out of business real quick! Is big oil afraid of running out of oil? Would they really want to hike up prices to limit demand?

I haven't done my research on the matter to see what companies are doing research on alternative fuel's but if my company was running out of a resource that was keeping it alive I would be spending a lot of money and time figuring out something new!

There are a lot of intellectual individuals on this forum, lets hear what you guys have to say about this article's points.

Remember this could be a touchy subject for some and I am here to promote constructive conversation so keep your facts backed up with cite's if you want a good healthy argument... and remember the one who looses an argument is the one who learns the most from the argument!



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Old 05-09-2008, 11:44 AM
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The Wall Street Journal had an article this morning about the Strategic Oil Reserve in the US and what they recommend we do with it (sell it, btw, b/c the price is so high). But, they also state that OPEC has a history of raising prices like this, and then just absolutely dumping the price as a means to eliminate all the competition in one shot. Possibly, we're about to experience this price dump again? It's a good read, and they also explain some of the reasons for the high prices:

http://online.wsj.com/article/SB121029497174279551.html?mod=opinion_main_commentaries
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Old 05-09-2008, 12:08 PM
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Well, here comes my chance to be a fool. I’ve traded and studied markets for over thirty years, so take my two cents for what it’s worth. The markets have gone into a completely technical condition and one with a new twist called the ETF.
Equity and Commodity markets are two completely different animals with different designs and natures about them, but now with the ETF we’re trying to turn a commodity into an equity. Here’s the difference.
Equity markets are designed to only go up. All of the regulation to protect the public and the army of salesmen are in place to gear the market to keep money flowing into it. Financing business is it’s purpose. The Dow & S&P indexes are rigged to go higher – they throw out the drags on the index and replace them with better performing stocks so that there is always an upward bias to equities. Doing away with the uptick rule for short sellers (this is because of all the electronic trading) may totally alter this on some very bad day, but that’s another discussion. On balance in the equities market, everybody wins when it’s up and loose when it’s down. It’s a market of perception and hype beyond the value of real property and profits of the companies traded.
Commodities on the other hand are designed to be an insurance or pricing mechanism for the producers or end users of the commodities. The public and non commercial participants need to – on balance – loose to the commercials for the market to work properly. DID I LET the cat out of the bag here? This is facilitated by giving the non commercial a great deal of leverage – that again on balance – allows human nature to easily give into greed, and loose. Understand that a commercial has no leverage since they own or will own the actual commodity. You hear about the winners, but that the marketing hype. Most specs loose to a few winners. There are times this gets a little out of whack, but not for to long. It’s the leverage that makes this work, forces over trading, and over time gives the benefit to the hedger – someone who’s using the market to fix price.
What the ETF has done is remove the leverage. This allows the small fry to sit through corrections just like a hedger instead of getting blown out and loosing. Many commodity markets now have these unleveraged ETF’s attached to them and I think this may alter the game. At least it’s a new element and we learned in 1987 (with the program trade funds were using to hedge their equity positions) that new elements require new rules or will have unforeseen consequences.
Where are we at now in oil? You’ll here talk of the Elliot Wave, and this is often seen in commodity markets. It goes like this – Insiders and commercials close to the markets start buying and take price up a little in wave one – nobody sees this or at least has no reason to see it as a trend change yet. In Oil you can see this action inside of lager and larger waves, but was essentially the move from 30 to 50 in 04/5. Then we get a pullback, or correction that ends when the market moves up to a new high – this is when the pros, specs and traders see something and get in to drive prices higher in wave two. Wave two will correct and then move back up and make a new high and the end wave or wave three begins. Now is when it’s on the news, the rookies dash in, the price goes parabolic. This phase is where the largest move generally takes place. It’s also the end.
Large traders will sell into the market with enough size to knock it down looking for the point new buyers will come in to support their position. This is where we’re at now – the markets are on automatic – fundamentals have already been discounted. It’s automatic because pros start liquidating their positions to the rookies. The commercial sellers are caught short and their covering forces the market higher when suddenly the parabolic move exceeds any fundamental price point they’ve calculated. Because of this action the only thing we can know is that the end is near in time, but price may be much higher. This now is insanity, and when the market ends will collapse back to where (say 95/115) the last move started then try to go higher again. If it fails to make new highs it will then fall back to around the 85 level that can be justified. It will ultimately overshoot the low number too, but this is when the market has the high leverage it is used to. The ETF - USO – may remove some of that pressure.
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Last edited by crash9; 05-09-2008 at 12:32 PM.
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Old 05-09-2008, 12:58 PM
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Quote:
Originally Posted by POS View Post
The Wall Street Journal had an article this morning about the Strategic Oil Reserve in the US and what they recommend we do with it (sell it, btw, b/c the price is so high). But, they also state that OPEC has a history of raising prices like this, and then just absolutely dumping the price as a means to eliminate all the competition in one shot. Possibly, we're about to experience this price dump again? It's a good read, and they also explain some of the reasons for the high prices:

http://online.wsj.com/article/SB121029497174279551.html?mod=opinion_main_commentaries
Yep - but China is also adding to their SPR and it makes me think somethings up. Between them and US represent the biggest buyer in the market. I hope we have a very savvy trader in the administration. Right now I think it'd only correct the market and wind up forcing it higher. China is gaming this deal - they tried it in copper buy shorting the market at $2 a few years ago and got blown out pushing it up to $4 the first time. Now they're buying, which worries us and keeps us in to match them. There's a lot of games being played right now.
As for the Arabs - they did pull that back in 1986, but I really don't think they've got anything to dump anymore. GS called for $200 last week, and I really think that's just hype to let them get out.
Look for a near term top just ahead/after Memorial Day.
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Old 05-09-2008, 01:17 PM
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Quote:
Originally Posted by kaiz3n View Post
So I haven't really found many articles in the news about why gas prices are where they are and the articles I have found are not really all that informant or really old.
As far as I know the two main reasons for the rise in oil price is the falling dollar and increasing world-wide demand, especially from China and India. Speculators in my view are only a small part of the equation and like the article says they are unlikely to alter the long-term trend. One thing that would help lower fuel prices is to jack up the interest rates on the US dollar to make it more attractive to investors. That would strengthen the dollar and oil prices would fall since oil is priced in dollars. It would also be nice to stop the saber rattling coming from our administration and start dealing with our deficit. But in the meantime I definitely agree that high oil prices are good for alternative energy development and conservation.
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Old 05-09-2008, 01:21 PM
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Someone has to pay for all of those new gas stations in China and India. They didn't ask for volunteers so that means we all pay.

ANWR will be developed also before the pressure is off.
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Old 05-09-2008, 01:22 PM
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Wow, Crash9, that was a wonderful explanation. It's kind of like peeking behind the curtain and seeing the actors without their makeup! Eeewww!

B
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Old 05-09-2008, 01:27 PM
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Ya, but everybody still wants to blame Bush, China, Opec, or whomever, instead of looking at what really drives the price - speculators.
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Old 05-09-2008, 01:40 PM
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Speculators would not be jumping into oil if it weren't for the falling dollar. You should look at the underlying cause, not the effect.
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Old 05-09-2008, 02:18 PM
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Quote:
Originally Posted by Botnst View Post
Wow, Crash9, that was a wonderful explanation. It's kind of like peeking behind the curtain and seeing the actors without their makeup! Eeewww!

B
Thanks - Of course it's "in my opinion" and the short - very short - version
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Old 05-09-2008, 02:45 PM
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Quote:
Originally Posted by waybomb View Post
Ya, but everybody still wants to blame Bush, China, Opec, or whomever, instead of looking at what really drives the price - speculators.
You're not really wrong over the short run, but it's the specs that keep this a free market. Without them - and they'll be there - with or without an organized market, you'd have Cargill vs. the farmers. The specs get in the middle and allow business to take place at what can be shown to be a better price to the end user. Over short periods though, you're very right. That's where we are right now, but don't worry, they will be punished and that will be to the benefit of the stockholders first and the public secondly. If it weren't for the insanity in price now to motivate alternatives and conservation we would wait until the supply side becomes hopeless and be standing in the dark wondering what happened.
I have to file a report every day about what I do, so there's nothing that is not known to the regulators. My knack is to trade on differentials instead of outright buying and selling, so that over time things reflect an economic reality.
Buy Beans/Sell Corn or sell Bean Meal/buy Bean Oil - sell Crude/buy Nat Gas. and so on. Without the spreaders the differentials would widen wildly in favor of producers and retail would be a much more expensive world.
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Old 05-09-2008, 03:41 PM
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I heard today analyst predict gas could be at over $5.00 a gallon by the end of this summer!

NOW I'm glad that we also have our Honda Element. Great gas mileage, lots of cargo room, and it drives great! Have to save my 1989 420SEL just to use as a second car. Going to be like Europe as far as gas prices go!
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Old 05-09-2008, 07:57 PM
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Crash - so far I agree with everything you said. I wish you would write more on how this all really works. More, including me, need better understanding of it all.
And thanks for taking the time to write it out!
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Old 05-09-2008, 08:31 PM
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Originally Posted by waybomb View Post
Crash - so far I agree with everything you said. I wish you would write more on how this all really works. More, including me, need better understanding of it all.
And thanks for taking the time to write it out!
Seconded. I'd welcome your insights into how the oil/energy ETF's and us amateurs affect the comodities market and speculators.
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Old 05-10-2008, 01:26 AM
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My bet is that gas will hit $4.25 during the summer and then drop to $4 by the end of the year. It's not based on scientific evidence or market research, just a gut feeling.

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