Crude Oil Prices: “Random”? Hardly.

14 Comments on "Crude Oil Prices: “Random”? Hardly."

Dredd on Sat, 3rd Dec 2016 9:10 am 



Crude oil causes crude disease (Will Elections Cure The Disease? – 3).

joe on Sat, 3rd Dec 2016 9:48 am 



Saudi plans to sell shares in its state owned company, they need a high price. Once they raise enough cash, they wont care about price, also the idea of selling shares to say Britian and the US is really smart. The Saudis plan to commit genocide against the Shia people (the genocide of christians and yazidis is complete), they will do it through proxy groups like isis and al qaeda, they need the US to take out Iran and sideline Russia, then they need cash to pay for proxy front groups. They hope Western greed will keep the Western Governments quiet while they go about the work they feel God wants them to do.

onlooker on Sat, 3rd Dec 2016 10:35 am 



Ha the markets much easier to herd than any animals you can think of.

rockman on Sat, 3rd Dec 2016 10:56 am 



“Since 1998, OPEC has cut production 15 times.
“A week later, U.S. crude rose 60 percent of the time…“…But a month after cuts, U.S. crude was down 53 percent of the time.”

Not difficult to understand this dynamic when one remembers the oil prices discussed are not the prices the vast majority of PHYSICAL oil is actually are selling for. The “gyrations” are in the oil futures market place. A completely insignificant amount of physical oil is sold at the futures price in the spot market. And 95%+ of the “oil” traded in the futures market isn’t even physical oil but PAPER bbls…numbers in a computer.

There is linkage between future prices and actual oil sale prices. But during December the Rockman (and every other oil producer) will sell oil…and the recent big increase in the futures bids will have ZERO impact on what the Rockman sells his oil for. That price will be a somewhat complex calculation based on the AVERAGE future prices for the previous 1 to 3 months depending on the individual LONG TERM sales contract. Long term sales contracts where the overwhelming majority of PHYSICAL oil is actually sold.

So how will the recent jump in the future bid prices for PAPER bbls effect what the Rockman sells his PHYSICAL bbls for in future months? Perhaps very little or none at all: the price won’t be based on these few days. As the article clear points out that such upticks in futures bids are often followed a month later by downticks. Which hopefully explains to folks here why long term oil sales contracts, which often use more the one benchmark futures price as a baseline, don’t hang on a daily bid. Nor a weekly average. But some only a monthly average and others longer. And remember we’re not talking calendar months but the 30 day future months.

So yes: overall previous monthly price trends will have an impact on the oil prices PHYSICAL oil bbls EVENTUALLY sell for. But the “settlement prices” paid for the current 10,000 bbl FUTURES contracts of PAPER oil will be higher or LOWER when those contracts expire after a month. And again as Mr. Elliot explains that settlement price will be determined by the price bid on those PAPER bbls at expiration of those PAPER bbl contracts A price often lower then the original bid for those PAPER bbls.

Lower not because PHYSICAL oil prices are lower but because expectations of the price of PAPER bbls in the next 30 day contract is lower. IOW totally dependent upon the psychology of the futures market and not the actual sales of PHYSICAL oil.

Boat on Sat, 3rd Dec 2016 1:40 pm 



rock,

That is true for you and the producers but the price of gasoline jumps around for the consumer with just a few days lag time. We don’t care about futures and pricing mechanisms, only what affects us at the pump. Lol

rockman on Sat, 3rd Dec 2016 11:53 pm 



Boat – “We don’t care about futures and pricing mechanisms, only what affects us at the pump.” So true. And the MSM only provides some cover for retailers jumping the price at the pump by hyping upward price movements in the futures market. It gets the public expecting pump prices to increase despite the fact that the used to make that fuel was purchased weeks or months earlier.

Outcast_Searcher on Sun, 4th Dec 2016 12:29 am 



Elliot Wave analysis. Given the track record of its proponents such as Bob Prechter, it looks like one thing that makes less sense than the ETP model.

GregT on Sun, 4th Dec 2016 12:46 am 



“So true. And the MSM only provides some cover for retailers jumping the price at the pump by hyping upward price movements in the futures market. It gets the public expecting pump prices to increase despite the fact that the used to make that fuel was purchased weeks or months earlier.”

Hmmm. Sounds like a conspiracy theory to me.

Kevin doesn’t do conspiracy theories. What you see on TV, is reality.

makati1 on Sun, 4th Dec 2016 2:10 am 



Interesting how gasoline prices jump around in the U$, sometimes changing twice in the same day. Here, prices rarely change more than once a month, if then. Could it be that the Philippines buys its gasoline and diesel by contract and there is not much movement possible until the next contract is negotiated? Which, by then the price of gasoline and diesel has gone back down?

At the moment, gasoline is about $3.40/gal and diesel is about $2.50/gal at the local station across the street.

Boat on Sun, 4th Dec 2016 4:11 am 



That would be an interesting topic of research. In the US I assume refineries are given some kind of regulatory window of time to adjust prices. Higher prices seem to take a few days while lower prices seem to take a couple of weeks to react to the crude market.
I think it was Argentina that set it’s crude price at $67 per barrel. I suspect their consumers see little change. So a comprehensive report of how countries handle crude price movement would be interesting reading.

Boat on Sun, 4th Dec 2016 4:13 am 



Greggiet,

You have some evidence of deep state control here? Lol

rockman on Sun, 4th Dec 2016 10:11 am 



Boat – There’s no more gasoline price regulations then there are regulating the price of a latte at Starbucks…except during a disaster emergency. ExxonMobil could legally raise its price to $20/gallon. Just as drivers can legally chose not to fill up at an XOM station.

But the are fed/state regulations that can cause huge price swings both geographically and time frame. Sorry for this length but like most topics here bumper sticker style there’s no short answers for complex dynamics. An old story but still works today.

A gallon of gasoline in the United States today is – on average – 60 cents more expensive than it was a year ago. This represents about a 50 percent increase in price. Gasoline prices in the Milwaukee/Chicago area, however, peaked at about double the price of a year ago.

From 2000: The Effect of Federal Regulations on Gasoline Prices in the Milwaukee/Chicago Area

So about half the price increase experienced in the Milwaukee/Chicago area was due to the general increase in world oil prices. The Congressional Research Service, for instance, reports that refiners’ crude acquisition costs have risen by the equivalent of 48 cents per gallon of gasoline over the past year and a half. That price increase is explained by three factors; OPEC production restraint, low domestic inventories of oil, and surging demand for oil products. About this there is little dispute, so I will not dwell upon it this morning.

As an aside, the price increase appears more dramatic than it actually is. First, it was preceded by the lowest inflation-adjusted oil prices in recent history: less than $10 a barrel in December 1998, a price that allowed gasoline to sell at $1.05 a gallon. Price increases were virtually inevitable, and given the historic lows of December 1998, they were bound to appear dramatic by comparison. Second, real prices even in the Milwaukee/Chicago area still don’t approach the historic peak price of $2.67 a gallon, which was set nationally in March 1981 after adjusting for inflation.

Nevertheless, why are prices higher in the Milwaukee/Chicago area than elsewhere? Simply put, the imbalance between gasoline supply and demand is greater here than elsewhere in the country.

Imbalances in Supply & Demand

Disruptions in the transportation network are primarily responsible for limiting the supply of gasoline in the Milwaukee/Chicago area. An inability on the part of refiners to produce enough gasoline to keep up with surging demand has also contributed to the problem. Given the inelasticities of the gasoline market, those two factors alone explain the disparity between regional and national prices.

Gasoline demand has increased by 4 percent since last year according to the American Automobile Association but supply has remained unchanged. This imbalance is complicated by a shrinkage in inventory stocks: mid-June national inventories of reformulated gasoline were 6 percent below the June 1999 level and 16 percent below those of June 1998.

While this disparity between the supply and demand of reformulated gasoline has affected all markets that rely on the reformulated gasoline equally, the Milwaukee/Chicago market has been additionally hit by a production shortfall of the specific blend of reformulated gasoline that is required there and nowhere else. Going into the spring, only six refineries (all located in Illinois) were producing RBOB that could be sold in the Milwaukee/Chicago market. But production at those and the other facilities making gasoline dedicated to the Milwaukee/Chicago market is running about 7 percent below production a year ago and stockpiles are unusually low.

The cheapest and easiest way to supplement the production at those Illinois facilities is to ship gasoline via pipelines from Gulf Coast refineries. Unfortunately, the main pipeline that services the Milwaukee/Chicago area – the Explorer pipeline, which ships gasoline from refineries on the Gulf Coast to Chicago – experienced a major fire near St. Louis in March. Although the damage was repaired quickly and the pipeline opened for business ten days later, the owners of the pipeline and the U.S. Department of Transportation entered into a joint agreement to reduce the operating pressure of the pipeline by 20 percent, which reduced the volume of gasoline moving through the pipeline by 10 percent. A rupture in the Wolverine Pipeline on June 8 – the one dedicated reformulated gasoline pipeline from Chicago to Detroit that serves the Milwaukee region — has further reduced pipeline traffic by 20 percent although it returned to full operation by the end of the month.

While trucks and barges are an alternative means of delivering gasoline to the Chicago/Milwaukee market, it’s a far more expensive method of delivery and a limited delivery alternative given the paucity of unused truck and barge capacity. The upshot is that trucks and barges have not been able to make up the shortfall in deliveries caused by the pipeline problems and the use of trucks and barges has added expense.

An imbalance of only a few percent between supply and demand seems at first blush to be a minor problem, but given the nature of gasoline markets, it is quite serious.

Gasoline Economics 101

The demand for gasoline is inelastic in the short run. That is, it takes a large increase in price to reduce consumer demand even a little in the near term. Economists calculate that short-term price elasticity for gasoline is about -0.05. That is, if prices go up 1 percent, consumer demand will decrease in the short term by only one-twentieth of 1 percent.

Accordingly, when the demand for gasoline outstrips the available supply (even by just a little), prices have to go up a lot in order to keep the gasoline pumps from literally running dry. Thus, if local gasoline supplies are 2-3 percent below where they need to be to meet unmoderated consumer demand – the figure most market analysts believe to be correct for the Milwaukee/Chicago area – price would have to jump by more than 50 percent in order to prevent spot shortages.

Prices, remember, are used to allocate scarce goods. Although demand for gasoline is far more elastic in the long run, in the short run, small disparities in supply and demand (in either direction) will always by necessity have a large impact on prices.

Thus, we know all we need to know to explain the supposed mystery of retail gasoline prices in the Milwaukee/Chicago area. OPEC production cutbacks and surging world oil demand have driven the price of oil from around $10 a barrel in the winter of 1998/99 to around $30 a barrel today, adding 50-60 cents to the price of gasoline per gallon. Pipeline ruptures and production shortfalls have further reduced Milwaukee/Chicago supplies by 2-3 percent, which — given the inelasticities of demand – explains the 50 cent difference between peak regional gasoline prices and national average gasoline prices.

Why the Production Shortfall?

What role have politicians played in all of this? Approximately three-quarters of the price hike in the Milwaukee/Chicago area can be explained by circumstances largely outside of government’s control; the OPEC production restraint and the pipeline ruptures. This is also the conclusion of economist Lawrence Kumins in his June 16 report on midwestern gasoline prices for the Congressional Research Service.

One-quarter of the price spike, however, can be laid directly at the doorstep of government. Refineries have had a hard time keeping up with the demand for reformulated gasoline in the Milwaukee/Chicago market, and that production shortfall is a logical consequence of poorly designed federal and state policies. Refinery production has been limited by the reformulated gasoline mandate passed as part of the 1990 Clean Air Act, unnecessarily burdensome environmental regulations promulgated by the EPA, and the continued demagogic nature of Congress, which deters investment in the refining industry.

Reformulated Gasoline Mandate

As a consequence of the Clean Air Act Amendments of 1990, areas that violated federal air quality standards were required to sell only specially reformulated gasoline beginning June 1, 2000. This new gasoline is blended with various oxygenates (primarily methyl tertiary butyl ether – MTBE, or ethanol) in order to reduce the emission of carbon monoxide, a significant contributor to wintertime smog, and to reduce the amount of toxic chemicals, such as benzene, in the fuel. This reformulated gasoline now serves 30 percent of the country.

While today’s reformulated gasoline (known in the regulated community as “Phase II” reformulated gasoline, or RFG-2) is 1-2 cents more expensive per gallon than last year’s “Phase I” reformulated gasoline and 5-8 cents more expensive than conventional gasoline, the real consumer impact of reformulated gasoline is related to the rigidity it imposes on national gasoline markets.

The accompanying map of the United States shows the different federal requirements for retail gasoline. As of October 1999, there were essentially seven separate gasoline markets. As of today, there are eight; gasoline is reformulated with ethanol in Milwaukee and Chicago but with MTBE elsewhere.

This is a crucial point. As noted earlier, gasoline intended for ethanol reformulation requires a unique blendstock known in the trade as “RBOB.” That’s because ethanol evaporates easily and unburned evaporated fuel is a major contributor to smog. Gasoline intended for ethanol blending must, accordingly, be specially made in order to minimize ethanol evaporation rates.

Because of RBOB’s unique characteristics, it must be segregated from other gasoline all the way up the transportation system until the point just before it is mingled with ethanol and delivered to the service station. Accordingly, it cannot move through normal distribution channels and requires an entirely separate, dedicated transportation network.

This congressionally mandated balkanization of the gasoline market has seriously hampered the flexibility that refiners would otherwise have to react to spot shortages (and the related opportunity for profit making). Because it is inefficient to segment refining operations to produce multiple fuel blends, refiners generally dedicate their facilities to the production of one particular gasoline blend. Going into the spring, most of the RBOB for the Milwaukee/Chicago market was produced by six refineries in Illinois. Unfortunately, shifting production from one blend to another is costly and time consuming. Accordingly, refiners cannot react quickly to profit-making opportunities.

Why did the refining industry initially underproduce RBOB? Two reasons. First, whenever new gasoline blends are introduced to the market, an adjustment period almost always takes place that is frequently characterized by temporary supply and transportation dislocations. Refiners and merchant facilities need time to figure out the marketplace, their place in it, and to learn the most efficient way to deliver the new product to consumers. This shakeout is temporary but inevitable. As even the EPA acknowledged in its November 1999 “Fact Sheet on Reformulated Gasoline”:

It is not possible to accurately predict the retail price of Phase II RFG [reformulated gasoline] in the year 2000 because it will be influenced by many factors including production costs, weather, crude oil prices, taxes, and local and regional market conditions. It is important to note that, at the start of the Phase II RFG program, retail prices may be higher or fluctuate more.
Accordingly, there should be no surprise that the introduction of this fuel in the Milwaukee/Chicago area on June 1 led to problems as the industry adjusted to new market conditions. Government mandates will always produce such periods of temporary dislocation.

Second, a federal appeals court ruled in March that Unocal legitimately held a patent on the most efficient method of producing RBOB. Refiners were forced to either pay Unocal royalties on RBOB production (imposing a 1-5 cent per gallon tariff on the cost of RBOB) or use a less efficient means of producing the blend. While the direct cost of the Unocal patent is thus minor, the indirect cost has been a reduction in RBOB production. Given the low profit margin that refiners typically operate under, many refiners simply chose to dedicate their facilities to the production of other blends.

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