The Perceived Oil Shortage

[TexasKowboy]

As I stated in another thread. This shortage has been created by the futures market.

Currently .5% of all oil futures are actually taking delivery. That means that the other 99.5% of oil futures purchased have no plans on taking delivery of the product.

This creates a false shortage. Demand is there with the purchase of futures however there is no plan to use them. They will be traded before the due date.

What they are doing is ordering 100 barrels of oil. The producer says crap we don’t have 100 barrels of oil it is going to cost XXX to produce 100 barrels of oil. So we have to change the price to cover our cost. The price changes. The buyer sells his 99.5 barrels for the new price. Then takes delivery on ½ a barrel. The oil company still produces the 100 barrels.

What is going to bust the bubble is we are going to have a surplus of oil once everything is said and done.

[antneye]

[iceman5]

I may misunderstand futures, but I think your explanation is wrong. I believe its more like options contracts which I do understand very well and trade them regulary.

When I buy an option, Im paying for the right to buy a certain stock at a certain price sometime in the future no matter what the price really is at that point. I may exercise the option and buy that stock but most options are just trading vehicle as people never actually take delivery of the stock.

People who buy oil futures have no intention of buying oil. They are just trading the futures contracts. Therefore, they arent altering oil production although it most certainly drives the price up or down. The 99.5% and 0.5% numbers come into play when you look at what I said about most people having no intention of buying oil when they buy futures.

I guess Im trying to say that the buyer isnt buying 100 barrels and only taking delivery of .5 barrel. Its more like only 1 out of 200 people buying futures actually takes delivery of the oil.

Either way, you are correct that its speculation driving the price up above the sustainable supply / demand correct price and the bubble will burst at some point.

[TexasKowboy]

I think Ice explained it a lot better then I did.

Antneye,

I don't think it will fall back. If it does someone in the Goverment will figure out how to put a tax on the difference and make it up.

I do think it is going to stop climbing soon. I think $4 gallon will be the country average.

[Beavis68]

There won't so much be a flood of oil as a collapse in prices the money to keep bidding up the price dries up. Once this happens people will panic sell to avoid bigger losses.

The funny thing is that futures actually help stablize prices. Swings will be even worse without them as people would try to horde and cause shortages otherwise.

[Nortonesque]

[Beavis68]

[TexasKowboy]

[Beavis68]

[T-Rod]

[iceman5]

[T-Rod]