More Drilling Doesn’t Mean Low Gas Prices (BNO $UNG $USO)
The U.S has been working to up the production in the states. Many people see this as great news for oil prices. However, things really aren’t that simple. Let’s break this down and look to Peter Cohan for more details.
If oil prices were determined solely by supply and demand for oil, U.S. production might matter more to the price. But, as I posted April 8th, thanks to a 1999 regulatory change, what matters most to the price of oil is the positions that speculators — who do not take delivery of oil – take. When oil hit $147 a barrel, investigators found that those speculators accounted for 81% of the trading volume in the oil markets.
And there’s an easy way to take those speculators out of the oil price equation: raise the amount of capital they need to invest in their bets on the direction of the price of oil. That’s important because speculators like to bet using borrowed money so they can amplify the gains they make on the sliver of equity that they put into those wagers.
And when the commodities exchanges require the speculators to increase the amount of their own capital — dubbed margin — into their bets, the price of oil seems to go down. A case in point is February 2011 when the exchanges required traders to boost the margin in their bets.
Gas prices are very complex equation. This is something to keep in mind when deciding on investment options. This may be a good lesson to remember, be sure to research thoroughly and consider all elements to your investments.
Quotes taken from report by Peter Cohan, Read the entire article here.
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You shoot yourself in the foot with your own argument. If “speculators” are responsible for “high” prices (and not supply and demand), then why are natgas prices at decade lows (and multi-decade lows inflation adjusted?) Could it be that there is now a MASSIVE glut of natgas and prices have responded as they should?
How about oil supply/demand fundamentals? Is it really all that surprising prices have steadily risen just as spare supply has steadily diminished? World oil demand set to set (another) record this year. Supply cushion incredibly tight at ~2MM bpd (ie ~2% cushion). What happens if there is a disruption in the ME? What happens if Iran stops sending its ~2MM bopd to the markets?
I think the point that was made in that article was valid as speculators do have a lot of influence over the commodity markets.
However I am a firm believer of the economics of supply and demand and how they are effecting the price of oil. Cheap and easy oil is a thing of the past as it is more difficult and more expensive to produce the oil such as oil sands and deep sea drilling.
Natural gas has taken a huge hit because it is localized (not enough LNG infrastructure to export in large quantities) and new technologies have unlocked massive quantities of natural gas which have flooded the market with over supply driving prices down.
Thoughts?