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Why are oil futures so low?

Discussions about the economic and financial ramifications of PEAK OIL
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Unread postby goldmund52 » Mon 23 May 2005, 10:19:51

$this->bbcode_second_pass_quote('halfin', '
')This indicates that business hedging against the risk of future oil price increases is not playing a major role in the market.


The commercial long open interest at the NYMEX has never been higher.
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Unread postby goldmund52 » Mon 23 May 2005, 10:31:07

$this->bbcode_second_pass_quote('pea-jay', 'H')ere is a fear I have about those long term post peak contracts:

What assurance will you have in collecting? I mean if the whole economy collapses or hyper inflates-will the investment be collectable? Then what about government interference? Could the government(s) out of desperation seize those barrels? I am not too knowledgeable about the workings of futures beyond the basics.


The government could easily interfere with the oil market. For example, they could blame high prices on speculators and require 100% margin for speculative accounts.

The government could make it illegal to own gold (already did once.)

The government could freeze banks accounts to prevent a run on the banks (other governments have done this).

Governments have, can, are now doing, and likely will do all sorts of things that hurt the average person financially.
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Unread postby bobcousins » Tue 24 May 2005, 16:39:19

$this->bbcode_second_pass_quote('halfin', 'B')ut in the markets, the financial incentive is to be right. You make money if you guess right and you lose money if you guess wrong. To me, that is a more reliable place to look to see what experts honestly believe about oil prices. It is, as others have noted, where you put your money where your mouth is. And it seems that the message from the markets is that they expect prices to stay about the same as today.


This really is a complete fallacy. In order to be right, they would have to have information that no one else has and be able to predict the future. In fact they have the same 5% of the picture that everyone else has available, and they make a guess. The idea that just because people who put their money where their mouth are lent any credibility is patently absurd. All it means is you have money you are willing to speculate with.

In order to make money, you only need to be slightly better at guessing what other people are guessing. The message from the markets is that most people do not have a clue what is going on.
It's all downhill from here
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Unread postby andris » Wed 01 Jun 2005, 19:43:22

<<<Take a look at http://futures.tradingcharts.com/market ... ?market=CL as one sample site. Today, you can buy oil for delivery in 2010 for just $46/barrel. Most Peak Oil authors predict that oil is likely to be much higher than that in that time frame. >>>

I am not a high roller, but am trying to make a small investiment in this. Question : why is it impossible to buy crude oil call options on NYMEX for 2007 at $60?? Just because NYMEX list them for sale, does NOT mean that a trade can be carried out because there needs to be a buyer AND a seller! There appears to be no sellers!!
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Unread postby Jaymax » Fri 17 Jun 2005, 21:35:44

$this->bbcode_second_pass_quote('goldmund52', '')$this->bbcode_second_pass_quote('MicroHydro', '
')I purchased 2010 and 2011 oil on NYMEX.


Hey, congratulatons! I'm in DEC08 and DEC09. We could start a "put-your-money-where-your-mouth-is" club. There might only be two members though. :)

I'm feeling pretty good about my positions, too. The commitment of traders report is very bullish, IMHO.


Can I join too? :o Dec-08 and Dec-10 here, just a handful, since Nov last year, nothing too heavy, enough to clear my mortgage in short order if things carry on the trend of the last two years or so...

--J
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Unread postby Jaymax » Sat 18 Jun 2005, 17:59:28

In further reply to the original poster (and a general blurb on buying into the market for anyone interested):

$this->bbcode_second_pass_quote('', 'w')hy are oil futures prices so low? ... Today, you can buy oil for delivery in 2010 for just $46/barrel.


So, you've probably got to the point where you can think about time in two dimensions, as futures trading requires. One dimension is the delivery month for the contract (December 2010 in your example), and the other is the point in time at which the contract was traded which sets the value for the contract (ie: the day you posted, when CLZ10 was trading at $46/bbl)

Have a look at the graph at http://charts.barchart.com/chart.asp?sy ... OW&ov1=021

I've chosen Dec-06 (CLZ06) for a couple of reasons. Being a December contract, it's been traded on the market for a number of years (Dec contracts are first listed something like seven years ahead of maturity, most other months only three years or something...

Because it's '06, it's got more years of history than say Dec-08 or Dec-10.

I don't want to use Dec-05, because it's close enough to be subject to current speculation about short term supply and demand, and also potentially what traders call a risk margin - ie: a premium against possible freak events like weather or terrorism.

What this graph shows, is despite all their supposed expertise and awareness of the market, and all the factors pertaining to it, traders have agreed every month since Jan'02 that they were wrong when they agreed the previous month what the value of oil would likely be in Dec-06.

More particularly, pretty much every month since Jan'02, they've agreed that their previous collective prediction was on the low side, so they've cranked it up a bit.

So you shouldn't really put any faith in traders ability to get long term predictions about the price of oil right, based on their past results, they're actually remarkably useless. Given the distinct trend, it's almost like most of them must be missing or doubting something really quite significant. But then, they're traders, wheeler-dealers, looking for short term profits based on short term events - a storm here, a new pipeline over there...

Also, being financial wizzkids, they tend to talk far to much with economists, who reckon that demand inherently creates supply, rather than geologists, who figure that supply, unlike say orange juice or cattle or even currency, is more down to dead dinosaurs, and multi-million-year-duration geological processes.

So fear not, if you've got a bit of liquidity (say prepared to lose $10,000 absolute worst case if buying a single contract), can really promise yourself with utter honesty that if prices do drop and you do lose, you'll bail at the level you've set, and lick your wounds rather than hang on and risk everything, and that you won't over-reach buy buying more contracts than you initially decide, just 'cos things look good for a while, then go for it. Traders ARE starting to wake up to this - that's why there's that big upswing in the Dec-06 contract over the last couple of years. You can see the same pattern for all the contracts through Dec-11.

Say you buy one Dec-08 contract at $56, are prepared worst case to lose $10,000. The margin requirement is probably something like $4000 to start. You probably want to put something like $10,000 on deposit, that'll cover you needing to put down more margin even if the Dec-08 price drops as low as $50 before bouncing back (ie: looses $6 before gaining again - which hasn't happened yet, but could).

Then, so long as you stick to your guns, the most you'll lose (with one contract) is $10k. Should the market wake up to peak oil properly (say after supply shortages at the end of this year) and Dec-08 rocket to $120k, you've made $60,000 (with one contract). If the smooth trend of the last 24months continues, and oil goes up $20/year, then that's $10k (per contract) you can pull out every six months and put against your mortgage etc. You might decide initially, that for every $10k you make, you'll buy one more contract, till you have four or five, then stop. ALWAYS remember: the more contracts you hold, the more risk you have of losing everything if someone proves cold-fusion at the price of oil drops to $8/bbl.

Finally, workling out when to buy is perhaps the trickiest bit. There is strong temptation to buy when you see prices going up quickly, you might ponder it for a week, and then buy just as the cycle switches and prices decline for a week or three, blowing away your deposit before recovering. Ideally, you want to buy at the end of such a drop (May, rather than April or June in the graph above) - but when will the next drop be, and how deep will it go?

Of course, nothings guaranteed. Profit certainly isn't, but the trend does look solid, and peak-oil doesn't feel like a myth. Just 'cos traders don't seem very confident about where the price of oil in Dec-08 will be, doesn't mean you shouldn't trust that you just _might_ have a better grasp on the situation than most of them...

--J
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Unread postby avo » Thu 07 Jul 2005, 14:13:48

$this->bbcode_second_pass_quote('MicroHydro', 'I') purchased 2010 and 2011 oil on NYMEX. ... Man Futures is a reputable broker.


Micro, I've been poking around the Man Futures web site. They have many different types of accounts, but I couldn't find any specific info on fees, commissions, etc. Any advice as to what type of account is best for buying and holding these long-term contracts?

Thanks,
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Unread postby Jaymax » Sun 10 Jul 2005, 22:08:20

I started by trying to open an account with MAN (in London) - in my case they were disorganised to the point of being useless, lost my account application papers, failed to return calls, implying that they wern't interested in novice traders, and then - something like six weeks after I'd given up chasing them, and about a month after I had very satisfactorally opened an account with Berkley Futures (who have been great since the start), MAN started calling AND emailing me (about three times each, every other week or so) to try and sell me their services.

Of course, how they operate in London clearly isn't universal, as MicroHydro seems to have done okay with them.

Berkley charge me £17.50 per trade, and require my account with them to hold at least 150% of the Nymex contract margins (initial or maintenance as appropriate).

--J
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Unread postby avo » Mon 11 Jul 2005, 22:38:26

Jaymax, thanks for the info!

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Unread postby goldmund52 » Tue 19 Jul 2005, 00:56:53

$this->bbcode_second_pass_quote('avo', '')$this->bbcode_second_pass_quote('MicroHydro', 'I') purchased 2010 and 2011 oil on NYMEX. ... Man Futures is a reputable broker.


Micro, I've been poking around the Man Futures web site. They have many different types of accounts, but I couldn't find any specific info on fees, commissions, etc. Any advice as to what type of account is best for buying and holding these long-term contracts?

Thanks,
Avo


Also check out www.lind-waldock.com They've been around a long time; they're Refco now.
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Re: Why are oil futures so low?

Unread postby EricTrader » Wed 14 Sep 2005, 17:38:27

I had accounts with big compaines like Refco and Mann and had nothing but problems. I looked for smaller companies that have been around for 6+ yrs and found 2 with 0 complaints against them. I opened 2 account and still have both opened.

I believe these are the links for them:

Bright Commodity Futures Broker - http://www.brightcommoditybroker.com

I forgot the link to the other site..

They opened my account the same day I filled out there electronic applications. I trade crude oil for less than $15 round turn with all fees included. I never got that at the other companies. And I get my fills back fairly fast. Faster then any other place I traded.
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