Gas Prices

[TPS]

So you throw out lengthy posts talking about potential conspiracy of Paulson getting into Treasury, but add a dismissive sentence that market factors may have played a role in the changing of the weights?  Didn't we already talk market forces driving down the price of gas, resulting from a better weather forecast, end of peak driving season and downed capacity coming back online?  All these things happened in August.

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I never said market forces caused a change in the weights. See the explanation on how the weights are determined. I did agree that market forces were putting downward pressure on gasoline prices. The point I have made is that the decision to change the weight in the index helped create even greater downward pressure on gasoline prices (and not just by the influence of the reduced demand from GS's index, but also the announcement by GS of its decision to reduce the weight, which caused other traders to change their positions in the unleaded futures).

 

Was it a conspiracy to help the Bush admin? I certainly don't know. However the change in the weight seems inconsistent with what's stated on their web site. Here's their quote:

 

"The GSCI is world-production weighted; the quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data. Such weighting provides the GSCI with significant advantages, both as an economic indicator and as a measure of investment performance.

 

For use as an economic indicator, the appropriate weight to assign each commodity is in proportion to the amount of that commodity flowing through the economy (i.e., the actual production or consumption of that commodity). For instance, the impact that doubling the price of corn has on inflation and on economic growth depends directly on how much corn is used (or produced) in the economy."

[TPS]

Yes, I read the article from the Times.  And my complaint isn't that it's an article from the Times, my complaint is that it's an incomplete article.  And misleading.  It overstates the weighting reduction of gasoline by half (because, while they reduced unleaded gasoline, they added reformulated gasoline to the index, which is in part offsetting), and doesn't even begin to mention that the weighting of oil was increased by about 50%...

 

...yet, oil's dropped 20% over the same time that Goldman-Sachs has driven down the price of oil [sic].  One would expect, if GS reducing the relative importance of unleaded gasoline futures in the GSCI depressed gasoilne prices, that doing the opposite would have an opposite effect - namely, that increasing the relagive weight of oil futures would increase oil prices.  Clearly, this is not the effect.  Ergo, your argument is specious.

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It would be helpful if you provided the source for your statement of a "50% increase in the oil weight." While they announced a transition to the reformulated gas in June, initially they were supposed to "roll" 1/3 of the unleaded into the reformulated over a 3 month period. Instead, they rolled 1/3 in August, then phased out the unleaded contracts over sept and oct. So the end result was that the weight (formerly for unleaded, now reformulated) was reduced over a 3 month period.

 

Again, I'm not saying the move by GS was the only factor. I'm saying it helped push the prices even lower. Couple of quotes from the NYT article:

 

“They (GS) started unwinding their positions, and those other longs also rushed to the door at the same time,” said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.

 

“We saw gasoline fall 82 cents in the wholesale market over a four-week period, which is unprecedented,” he said. Mr. Goldstein said that the decline in gasoline prices helped send prices of the whole group of energy-related products down.

[GG]

Again, I'm not saying the move by GS was the only factor.  I'm saying it helped push the prices even lower.  Couple of quotes from the NYT article:

 

“They (GS) started unwinding their positions, and those other longs also rushed to the door at the same time,” said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.

 

“We saw gasoline fall 82 cents in the wholesale market over a four-week period, which is unprecedented,” he said. Mr. Goldstein said that the decline in gasoline prices helped send prices of the whole group of energy-related products down.

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And these were all August reactions. Even if you attribute the drop to the tag-along funds needing to liquidate their positions to be in line with the index, that would be a very temporary event. That unprecedented 82 cent drop over a 4-week period would have more than dissipated by now (4 weeks later) if the market conditions didn't warrant the price.

 

.. And the increase in the oil weights were all from the reductions in the gasoline weight. Where was the corresponding pop in price of oil futures for people needing to rebalance their portfolios to hold the extra oil?

[Wacka]

All this arguin' is makin' my head hurt!

 

All I know is that gas is cheaper and that is good!

[GG]

I wonder if there's a market based explanation for what Goldman Sachs did?

[TPS]

And these were all August reactions.  Even if you attribute the drop to the tag-along funds needing to liquidate their positions to be in line with the index, that would be a very temporary event.  That unprecedented 82 cent drop over a 4-week period would have more than dissipated by now (4 weeks later) if the market conditions didn't warrant the price.

 

That's what I've been saying. The decision by GS added another kick to the factors putting downward pressure on gas prices. That would help explain the initial "unprecedented" drop. Prices are staying down because of the demand-supply conditions. My argument is not inconsistent with that.

 

.. And the increase in the oil weights were all from the reductions in the gasoline weight.  Where was the corresponding pop in price of oil futures for people needing to rebalance their portfolios to hold the extra oil?

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Not according to GS's August press release. It looks pretty well distributed between the remaining energy-related products--crude wti, brent crude, heating oil (the largest shift), and gasoil.

 

Now that your jumping on monkey's bandwagon, my response to both of you is that, as I've said all along, there were multiple factors causing the drop in prices; supply and demand conditions were going to lead to a drop. Under most conditions, the drop would've been more gradual, not "unprecendented," yes?

With most factors indicating a drop in energy prices, the reallocation by GS to the other energy future's contracts would certainly not be followed by market speculators. When multiple factors are causing prices to fall, and you add another, that helps the momentum; when multiple factors are causing prices to fall, and only one factor adds upward pressure, certainly one would not expect prices to reverse.

 

AS for your last question, I trust you know that most participants in the futures markets are speculators--taking long positions when they believe prices will head higher, shorting when they believe prices will fall. They are not holding oil in their portfolios, they are speculating in a derivative security. When the market turns against their bet, they get out--as you mentioned before--by offsetting longs with shorts. I'm surprised (maybe I shouldn't be) that you can't see this possibility adding "fuel" to the drop in gas prices:

 

Market conditions were leading to a drop in gas prices--we all agree there. Under most circumstancess prices would fall at a steady or moderate clip. The argument being made is that Gold-Sachs' decision to re-weight the amount of unleaded gas in the GSCI meant downward pressure on future's contracts. when they addounced this move, that caused speculators in the futures market for unleaded to reverse their long positions--closing them out and then moving to short positions. The drop in unleaded futures prices helped create the "unprecendented" drop in spot gasoline prices in August.

 

A quote in the article, "at the start of the week (Aug. 9) everyone was talking about $4/gal gas." That means most speculators were still in long positions that week. When the market turned, for all reasons cited, including GS's announcment, that created "unprecedented" momentum for prices to fall.

 

Again, I don't know if it was a "conspiracy" or serendipity. The focus of this topic was on whether the Admin "manipulated" prices. I think I posted something early on that it was market conditions. I recently came across this interesting possibility.

People can draw their own conclusions.

[TPS]

I wonder if there's a market based explanation for what Goldman Sachs did?

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Thanks for finding that. It supports my point entirely. From the article:

1. But the weaker US gasoline futures and refiner margins are not just about the seasonal drop in gasoline demand from summer to autumn or the lack of big hurricanes. The decision by the Goldman Sachs Commodity Index to cut its exposure to the benchmark Nymex unleaded gasoline contract from a total of 4.8 per cent at present to zero by November also has been significant.

 

2. Investors were surprised by the decision on the Goldman Sachs Commodity Index because the ethanol-friendly Nymex RBOB contract was already part of the GSCI, with a weighting of about 2.5 per cent. Goldman Sachs had previously indicated that the weight of the benchmark Nymex reformulated unleaded gasoline contract in the index would entirely switch over to the RBOB contract.

 

Instead, it plans to split the unleaded gasoline weighting into the Nymex heating oil, West Texas Intermediate and the Brent crude contract. The subsequent price fall in the Nymex unleaded gasoline contract underlines the influence the index funds have on commodity prices. Some traders estimate index funds to account for between 30 and 40 per cent of the daily trade in the gasoline contract.

 

The article quotes an independent energy economist to explain the move:

Philip Verleger, an independent energy economist, said Goldman Sachs' decision not to roll all its gasoline index weighting into the RBOB contract was due to the fact that it did not want its commodity index to account for the majority of trading in the contract.

 

That has nothing to do with "market conditions," rather how influential the index can be on the futures price--which is the point I've made all along. So the decision by GS, according to this economist, was made to reduce their influence on the new RBOB futures contract, but it actually lead to influencing the old unleaded contract. Serendipity or conspiracy, who knows?

[GG]

That has nothing to do with "market conditions," rather how influential the index can be on the futures price--which is the point I've made all along.  So the decision by GS, according to this economist, was made to reduce their influence on the new RBOB futures contract, but it actually lead to influencing the old unleaded contract.  Serendipity or conspiracy, who knows?

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It has everything to do with the market, because GS didn't want to have a large portion of its index represented by an illiquid contract. Obviously you missed that explanation by Vergeler, who also said that GS does not want to be a leader, but a follower. Now that's an awesome conspiracy tactic. Follow the market, yet have it act in the way that you intend. Simply brilliant. No wonder they're the smartest guys on Wall Street.

 

Never mind the fact that the index is composed of heavily traded contracts on major global exchanges, and here we are three months after the initial decisions to reduce the gasoline weighting, and the price keeps going down. Oh, those wily Goldman bankers.

[TPS]

It has everything to do with the market, because GS didn't want to have a large portion of its index represented by an illiquid contract.  Obviously you missed that explanation by Vergeler, who also said that GS does not want to be a leader, but a follower.  Now that's an awesome conspiracy tactic.  Follow the market, yet have it act in the way that you intend.  Simply brilliant.  No wonder they're the smartest guys on Wall Street.

 

Never mind the fact that the index is composed of heavily traded contracts on major global exchanges, and here we are three months after the initial decisions to reduce the gasoline weighting, and the price keeps going down.  Oh, those wily Goldman bankers.

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I guess the other quotes are irrelevant? That article states how influential the index can be and was on unleaded prices. I quoted Vergler on the explanation. For one, he's not with GS. Yes, they don't want to be a leader in the new product--they don't want to influence its price. However, their action on "not wanting to influence the price" for the new product, caused price changes in the old unleaded product--and the FT article said it was a significant influence.

 

The gist of the article you link to (and the NYT article) supports the idea that GS's move DID influence the price of unleaded, and it was significant. Are you now disputing the gist of that article? Or since it's the position I've taken all along, is it that you have no choice but to continue to dance around and try to dispute that fact?

 

Conspiracy or serendipity for Bush? More likely serendipity, but the connection with his new T-sec allows for the possibility of the first. The link I initially found makes that contention. While I lean toward serendipity, the former wouldn't surprise me either. Because after all, no one has ever tried in the past to influence prices....

[GG]

I guess the other quotes are irrelevant?  That article states how influential the index can be and was on unleaded prices.  I quoted Vergler on the explanation. For one, he's not with GS.  Yes, they don't want to be a leader in the new product--they don't want to influence its price.  However, their action on "not wanting to influence the price" for the new product, caused price changes in the old unleaded product--and the FT article said it was a significant influence.

 

The gist of the article you link to (and the NYT article) supports the idea that GS's move DID influence the price of unleaded, and it was significant.  Are you now disputing the gist of that article? Or since it's the position I've taken all along, is it that you have no choice but to continue to dance around and try to dispute that fact?

 

Conspiracy or serendipity for Bush? More likely serendipity, but the connection with his new T-sec allows for the possibility of the first.  The link I initially found makes that contention.  While I lean toward serendipity, the former wouldn't surprise me either.  Because after all, no one has ever tried in the past to influence prices....

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The other quotes point to the immediate impact on the prices, and I did not dispute the fact that when components move in and out of an index, there is a pop up or down. However, once the one-time events are done, the underlying securities settle into their natural price.

 

The price of gasoline has been going down, because the underying contracts have been going down, no matter what the GS did to its index. Of course, there's yet a reply from you on how valid the index would be if the market participants thought that GS was manipulating it for its own benefit.

[TPS]

The other quotes point to the immediate impact on the prices, and I did not dispute the fact that when components move in and out of an index, there is a pop up or down.  However, once the one-time events are done, the underlying securities settle into their natural price.

 

Whew! That sure took a long time. I never said the prices were being affected by the index weight change after that. I agree prices will eventually settle to what the fundamentals dictate.

 

The price of gasoline has been going down, because the underying contracts have been going down, no matter what the GS did to its index.  Of course, there's yet a reply from you on how valid the index would be if the market participants thought that GS was manipulating it for its own benefit.

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Oh, oh! In one paragraph you admit there can be a "pop", and the next there's no effect?

 

Who said they were manipulating it for their own benefit? You asked some flippant question earlier about who the GS traders work for, not about manipulation for their own benefit. Try to stay on topic.

 

The topic: Both articles STATE that the change in the weight had a significant impact on gasoline prices in August. Are both the NYT and FT articles incorrect? Who should we believe? Them, or you and the monkey?

 

Seems to me the only contentious issue is, what was the underlying reason for the change? As i said, I lean toward the serendipity explanation.

[GG]

Oh, oh!  In one paragraph you admit there can be a "pop", and the next there's no

effect?

 

Yes, a pop is a temporary readjustment, while a price decline that lasts two months is not.

 

Who said they were manipulating it for their own benefit? You asked some flippant question earlier about who the GS traders work for, not about manipulation for their own benefit.  Try to stay on topic.

 

The topic: Both articles STATE that the change in the weight had a significant impact on gasoline prices in August.  Are both the NYT and FT articles incorrect?  Who should we believe?  Them, or you and the monkey?

 

Seems to me the only contentious issue is, what was the underlying reason for the change?  As i said, I lean toward the serendipity explanation.

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If you did not insinuate that Goldman changed the weighting of the index to aid the Administration, then what did you mean? Did you not make a reference to past practice of influencing prices? Was that not a reference to Goldman changing the weighting of the index?

 

Is that why you posted a conspiracy article and then questioned why GS would change the weights? Or do we just throw a coincidental nomination of Paulson at the wall and hope it sticks?

 

Do you believe in reverse serendipity, that gasoline prices were inflated in the spring of 2006 due to market forces or due to anti-Bush market intervention?

 

Wait a minute, maybe I'm onto something. Paulson was originally courted for Treasury back in the winter. When he declined the initial offers, Goldman decided to rub it into Bush's face by causing gasoline prices to go up in the spring. The August move was obviously the reconciliation.

[Wacka]

To get it back on the original topic instead of discussing economics, I paid $2.41 today.

[ExiledInIllinois]

To get it back on the original topic instead of discussing economics, I paid $2.41 today.

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It is down to $2.15 just across the border from me in IN.

 

 

 

Now people... I hope you are saving that extra money every month. Or was that high price of gas being charged on plastic? Then double nono to the list below and send it straight to the moneymen to pay down your debt incurred during the high price period...

 

Nonos are:

 

Taking in extra movies

Buying soda and a Twix bar

Lottery tickets

Etc.. etc..

 

[/dev/null]

Gas has gone up here. From 1.99 to $2.05

 

Curse you George W!

[VABills]

We are pretty much staying steady locally. 1.91-1.99 for regular.

[EC-Bills]

Gas has gone up here.  From 1.99 to $2.05

 

Curse you George W!

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Don't worry. With the Foley crap going on, I am sure it will dip down to under $2.00 about a week before the elections

 

Gas got down to $2.03 here but is now back up to $2.15.

[erynthered]

1.89 out side of Tampa.......

 

 

Friggin evil bastards.......

[SilverNRed]

1.89 out side of Tampa.......

Friggin evil bastards.......

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All part of the conspiracy......

[justnzane]

i just can't believe that it is still 2.56 up here outside of rochester. and that is 50 cents cheaper than when i last filled up the tank around labor day. 1.89 outside of tampa is crazy. i would actually drive around town if it was less than 2 bucks. But i still think there is some level of conspiracy goin on.