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Imperial Forum → Politics → Explain Oil Futures and Oil Speculation to me...
Explain Oil Futures and Oil Speculation to me...just like the title says.
Give me the run down, because somethings just seems wrong when I read stories about, "Oil Speculators". Someone give me the low down on how this piece of crap speculation garbage works.
As with any commodity you can preorder a set amount at a set price in advance. Say I promise to buy 100,000 barrels of oil from you in March 2011 at $75/barrel. That promise is a commodity on both sides, because you are also committed to sell 100,000 barrels of oil at $75 at that time. So if I find somebody, or a syndicate of someones, who feels sure oil will be $80 in March 2011, I can sell them my promise for instant cash. If oil is $80 / barrel then the guy who buys it off me will have saved $500,000 on the price of 100,000 barrels. If oil is $60 / barrel he lost a lot of money.
You might sell your end of the contract to people who will feel sure oil will be $40 / barrel. Or if somebody thinks oil will be <$75 / barrel at that time, they may sell you a guarantee against losses if oil is >$75 / barrel. They will accept the risk for the $$$ you pay as the price of the guarantee.
Where it gets messy is that oil production is really a cartel, with the producers colluding to keep prices profitable. Also, the producers don't mind putting money behind wheeler-dealers who then speculate on oil prices. Also, since the product takes weeks to ship globally, the amount of oil actually available for consumption, the amount of oil being pumped, the amount of oil being refined, and the amount being traded, are all separate entities. There are collective buyers who trade in massive quantities of oil and the promise of massive quantities of oil for billions of $ every day.
=^><^= That stinks. When you go into a store, you purchase at that price right then and there. When we call up our vendors for special order items, we ask for the cost of the item right then and there.
We don't call our vendors and ask, "Hey I'm thinking about purchasing some oil a year from now at March 15, what sort of price can you give me right then?"
If I call an oil vendor, I want the price right then and there. "Say how much you selling a barrel of Oil today, bulk?" I want the promisary price for that day, not a year from now. This speculation thing stinks.
That's just bad business, Key.
Picture a plastics manufacturer. To continue production, it needs a large supply of oil constantly streaming into its facilities. If, at any point, oil isn't at the factory, there's no production that day. How do you arrange the oil purchases?
Buying oil day to day is problematic for a couple reasons, including the loss of constant streams of transportation and the possibility of just not being able to find a reasonable seller.
Buying oil and storing it for the future is an even worse idea. You would have a giant, unsafe stock of oil in your facility. Plus you have to pay the cost of storage, which is quite large. Some companies may be able to pursue this method, but most can't...
We don't call our vendors and ask, "Hey I'm thinking about purchasing some oil a year from now at March 15, what sort of price can you give me right then?",<
I learnt in my contract law courses that the first dept stores started doing exactly that over 100 years ago
Future speculation happens for every commodity really....
That's why you have a PURCHASING agent. You buy so much oil at todays price. When your STOCK gets low, your purchasing agent orders more. Lumber market. You can only hold so much stock on hand at yard or a storage facility anyways. Buy enough to fill your yard or facility. Hell if your purchasing agent needed to they could order daily, if that's the only thing a manufacturer needed was to just buy oil. That job is simple.
And a good purchasing agent shops around. They don't just have one vendor to buy from, especially if the vendor's price is to high, he shops around and looks for the best price. This is what keeps oil prices lower, by creating competition to do just that. Compete in their prices. Obviously buying all of our oil from OPEC probably wasn't the best thing to do, especially during the oil crisis back in 1976. Russia sells. China sells. Hell Canada and Mexico sells and they are our nearest neighbor so what's up with that. NAFTA, can't get no oil from our own American Continent?
@You_Fool
OH geeze a giant cloud of ash covering europe that may lower temperatures and cause acid rain? I'm guessing food prices are going to go up, so buy Peach Pits & Fruits NOW. Yah, I can speculate that's gonna create a problem for food supplies. Not to mention how many towns are going to be wiped off the map due to warm and cold fronts now competing to create MUD slides across northern europe.
Key,
Futures trading is a lot like scalping, you know buying a ticket for a sports event and then hanging around outside the stadium the day of the event trying to sell it for a higher price.
Isn't scalping underhanded, illegal, and not a very nice thing to do...
So...whose the idiots doing the buying for the americans? Exxon? BP? Shell?...i'm sensing a very big rat within our american oil purchases. We're supposed to haggle, we're supposed to shop around. We're not supposed to unilaterally keep buying from the same people that gouge the prices on us, especially if they are purposely keeping the prices up to fill their own deep pockets.
futures are like stock trading a normal part of an efficient economy
what I'm wondering though is that when the oil price went from peak into steep decline surely a lot of speculators must have lost a lot of money??
Efficient economy....sounds like an oxymoron. Military intelligence, honest leaders, efficient economy. Words that do not go well together.
Imperial Forum → Politics → Explain Oil Futures and Oil Speculation to me...
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