Why is Oil falling?

[Mega]

I mean a fall Yes, a total collaspe...........No Way....but it has?
Mike

[GRG55]

Re: Why is Oil falling?

I mean a fall Yes, a total collaspe...........No Way....but it has?
Mike

That's a multiple choice question. Pick from one of the following:

1. People prefer to give their money to the US Government for 10 years at 2.09%;
2. Goldman Sachs is short oil; and whatever Goldman wants, Goldman gets [Newton's 4rth Law of Motion and Markets];
3. F150 sales have collapsed, as you wished. What did you think was holding up crude prices all this time?;
4. With the GM/Chrysler/Ford death-watch underway, Santa has been inundated with requests for reindeer powered sleds under the tree this year. Crude traders are responding accordingly.
5. The House of Saud had all its spare cash with Madoff; now they have to flood the market to make some of it back.
6. WalMart doesn't sell oil. If it did, we wouldn't have this problem because the price never would have gotten any higher than $2.67.

[stetts]

Reasons

GRG55--Now that was funny! Thanks, Stetts.

[Glenn Black]

Re: Why is Oil falling?

It appears to be short selling, piling on to a collapse in world economy. But you already knew that, didn't you.

[mcgurme]

Re: Why is Oil falling?

I mean a fall Yes, a total collaspe...........No Way....but it has?
Mike

This is a good explanation, just replace "pushing up" with "pushing down," since this article was written earlier this year. But the principle is the same.

The evidence points to a possible shortage of physical oil, especially with OPEC cutbacks. Hey, I'm betting on it, just went long on oil, and I'm up a bit already.

In general terms, perceptions about the real supply and demand for the underlying physical commodity come first, and investors jump on the bandwagon. However, also like any other financial market, the futures market has, on a number of occasions, misread signals. The paper market then fails to reflect real physical supply and demand. This arises partly because money managers, although smart people, do not always understand oil markets. For example, when asked why they are pushing up oil prices, they may reply “because there is a shortage” – and when asked why they think there is a shortage, they may reply “because the price is rising”. However, each time such a disconnect has been realised, the price has adjusted accordingly. At the end of 2006, prices fell quickly, and by almost $30 a barrel, when markets realised that oil was not in short supply. Subsequently, prices rose to new record heights in the wake of an OPEC cut in physical production. Since the start of 2007, another disconnect has emerged.

[Supercilious]

Re: Why is Oil falling?

I mean a fall Yes, a total collaspe...........No Way....but it has?
Mike

Mega, there are at least two explanations here:

A) one is my explanation from the oil bubble thread with a financial bubble anchored in commodities prices/futures . The vehicles of this financial bubble is what I call the ETN-like paper (synthetic derivatives based on commodities futures) which have very little to do with the crummy ETF/ETN's the beloved J6P buys through his e-trade account.

This ETN-like paper is traded on parallel, private and completely unregulated markets (144a OTC market) through private equity pools open only to institutional investors (dark pools). According to the latest BIS quarterly report the commodities (non gold) OTC derivatives increased in the Q2 -2008 (compared to Q1) with 56%, to a total amount of $12.6 trillion. This scam was so profitable that even the iron ore , which is not traded on any regulated commodities market was made to behave like oil, rice, copper ... well you get it.
http://www.metalprices.com/metalNews...svc=ODJ&type=1

You can think of ETN-like paper as the CDO's of commodities, but there is an essential difference. The ETN-like paper (unlike mortgage CDO's ) is a synthetic derivative, and that means the sellers/originators of this paper don't have to actually hold the underlying asset (physical commodities or futures). The paper has only to provide a return mimicking the possession of a physical commodity or another paper based on commodities (futures).

This detail allows the kings (originators) of this type of paper to pit the investors (dumb casino gamblers) against each other by netting longs against the shorts. The differential netted is hedged in futures. As a result Goldman Sachs (for example) not only makes great money by driving the price of oil to $147/bbl , but also can make another truckload of money by driving the oil price down to $35/bbl. The whole idea is to have the position differential netted against the price derivative.
The crude price of on Nymex has nothing to do with supply and demand price discovery.

B) From my limited understanding (and I may be wrong here because Fred's explanations are too complex for me) there was no Oil bubble at all:

http://www.itulip.com/forums/showthr...t=iron&page=15

We did not have an oil bubble but instead a complex set of factors driving oil prices rapidly upward, mostly due to expectations about future dollar purchasing power.

So, I guess that the price of oil went up to $147/bbl because there were expectations about the future increase in the dollar purchasing power (deflation).


Since the peak was reached, as it was well explained by others, the fact that the Fed simply cannot lower the rate below 2% and because there is a clear evidence of important capital outflows (capital fleeing from the dollar and US), of lack of interest for treasuries (nobody wants anymore to buy US treasuries as predicted by the Ka Poom theory), there are clear inflation expectations.

The definite proof of inflation expectations is provided by the raise in TIPS yields as magnificently demonstrated by Fred through graphic and artistic means:




As a result the oil price is pushed so low because the futures traders look at a chart as the one above and say: "Whoah!" ... and their inflation expectations rise and that drives the price of oil down, ...because it's obvious that in inflationary environments the price of commodities is decreasing because of the lower perceived future purchasing power of the dollar...

I hope that helps

[CLEO]

Re: Why is Oil falling?

Where Is The Bottom For Oil ?

[GRG55]

Re: Why is Oil falling?

Where Is The Bottom For Oil ?

Sure there is. Just like the official Fed Funds Rate, the nominal price can't go lower than $0.00.;)

[although I am sure there's a way to drive it negative in the parallel universe of Goldman Sachs, et al]

[kingcopper]

Re: Why is Oil falling?

Well, oil essentially quadrupled from $37 to $147 so it has overshot on the way down and will find a price of $40-$60 sometime in the next year?

Incidentally, didn't oil quadruple from $9 to $37?

Quadrupling in commodities bull markets is pretty normal.

Lets look at silver: $3-$12 and we're waiting for $12-$48 right now!

Lets look at gold:$250-$1000 and we're waiting for $850-$3500 right now!

what do I know?

[Master Shake]

Re: Why is Oil falling?

Mega, there are at least two explanations here:

A) one is my explanation from the oil bubble thread with a financial bubble anchored in commodities prices/futures . The vehicles of this financial bubble is what I call the ETN-like paper (synthetic derivatives based on commodities futures) which have very little to do with the crummy ETF/ETN's the beloved J6P buys through his e-trade account.

This ETN-like paper is traded on parallel, private and completely unregulated markets (144a OTC market) through private equity pools open only to institutional investors (dark pools). According to the latest BIS quarterly report the commodities (non gold) OTC derivatives increased in the Q2 -2008 (compared to Q1) with 56%, to a total amount of $12.6 trillion. This scam was so profitable that even the iron ore , which is not traded on any regulated commodities market was made to behave like oil, rice, copper ... well you get it.
http://www.metalprices.com/metalNews...svc=ODJ&type=1

You can think of ETN-like paper as the CDO's of commodities, but there is an essential difference. The ETN-like paper (unlike mortgage CDO's ) is a synthetic derivative, and that means the sellers/originators of this paper don't have to actually hold the underlying asset (physical commodes or futures). The paper has only to provide a return mimicking the possession of a physical commodity or another paper based on commodities (futures).

This detail allows the kings (originators) of this type of paper to pit the investors (dumb casino gamblers) against each other by netting longs against the shorts. The differential netted is hedged in futures. As a result Goldman Sachs (for example) not only makes great money by driving the price of oil to $147/bbl , but also can make another truckload of money by driving the oil price down to $35/bbl. The whole idea is to have the position differential netted against the price derivative.
The crude price of on Nymex has nothing to do with supply and demand price discovery.

B) From my limited understanding (and I may be wrong here because Fred's explanations are too complex for me) there was no Oil bubble at all:

http://www.itulip.com/forums/showthr...t=iron&page=15


So, I guess that the price of oil went up to $147/bbl because there were expectations about the future increase in the dollar purchasing power (deflation).


Since the peak was reached, as as it was well explained by others, the fact that the Fed simply cannot lower the rate below 2% and because there is a clear evidence of important capital outflows (capital fleeing from the dollar), of lack of interest for treasuries (nobody wants anymore to buy US treasuries as predicted by the Ka Poom theory), there are clear inflation expectations.

The definite proof of inflation expectations is provided by the raise in TIPS yields as magnificently demonstrated by Fred through graphic and artistic means:




As a result the oil price is pushed so low because the futures traders look at a chart as the one above and say: "Whoah!" ... and their inflation expectations rise and that drives the price of oil down, ...because it's obvious that in inflationary environments the prices of commodities is decreasing because of the lower perceived future purchasing power of the dollar...

I hope that helps

I love understated sarcasm.

Any thoughts on why the NYMEX price is about $8 less (as I type) than the Brent price? Usually it's higher. No ETNs on the Brent?

[GRG55]

Re: Why is Oil falling?

I love understated sarcasm.

Any thoughts on why the NYMEX price is about $8 less (as I type) than the Brent price? Usually it's higher. No ETNs on the Brent?

Maybe the London commodities exchange is less dark than Chicago?

[pescamaaan]

Re: Why is Oil falling?

just an observation - it's funny how in years past whenever oil made a move you'd see headlines such as "oil rises due to cold weather forecast for northeast" or "tropical storm activity forces oil higher" etc.. etc...

well it's cold up here in the northeast and about to get colder....and oil continues its downward fall.

(my point is that the headlines in the MSM describing market activity are usually baseless as most have no idea why markets move the way they do...)

[Chris]

Re: Why is Oil falling?

doesn't that describe all MSM headlines?

[GRG55]

Re: Why is Oil falling?

I mean a fall Yes, a total collaspe...........No Way....but it has?
Mike

Anybody ever remember seeing a $7.00 contango on the forward month? Moe??

Here's the quote for NYMEX WTI:

Jan-09	34.76
Feb-09	42.25
Mar-09	45.35 *
Apr-09	46.44 *
May-09	48.13 *
Jun-09	49.52 *
Jul-09	50.69 *
Aug-09	51.66 *
Sep-09	52.54 *
Oct-09	53.31 *
Nov-09	58.94 *
Dec-09	55.60 *

[In other words be careful about assuming everyone is selling their oil at a WTI reference below $40 as Bubblevision would have you believe]

[Jay]

Re: Why is Oil falling?

Anybody ever remember seeing a $7.00 contango on the forward month? Moe??

Here's the quote for NYMEX WTI:

Jan-09	34.76
Feb-09	42.25
Mar-09	45.35 *
Apr-09	46.44 *
May-09	48.13 *
Jun-09	49.52 *
Jul-09	50.69 *
Aug-09	51.66 *
Sep-09	52.54 *
Oct-09	53.31 *
Nov-09	58.94 *
Dec-09	55.60 *

[In other words be careful about assuming everyone is selling their oil at a WTI reference below $40 as Bubblevision would have you believe]

Must be because the Israelis aren't going to stand for this:



;)