Gas Prices

[RkFast]

Not sure where this sub-thread is going but let me weigh in a bit.

CTM commented purely on how commodity prices can be affected by monetary policy. As far as gasoline is concerned:

- domestic production of gasoline since May is at an all time high. For the period of May-August, we are producing (just by eye-balling here) 9.1 million barrels per day of gasoline compared to about 8.8 MMBPD a year back.

- Winter gasoline formulations can be made with less cost and more quantity by refiners.

- Peak driving season is gone and demand is down compared to the summer season

- This year there was a new mandate to blend ethanol into gasoline and the gasoline marketers had trouble with the logistics causing depressed supply early in the year. I think these issues have been resolved

 

All these factors make gasoline prices go down. In the real shortrun, the administration can directly affect only the commodity prices (oil in this case) through monetary and defense policies. Other factors are related to supply-demand which is to large for the adminstration to influence (again, in the short run).

As a side note, nation wide average price is about $2.40. I still believe we will never again fall below ~$2.25.

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Thanks for the info. Wow...an answer to a simple question without juvenile bull sh--. Very nice!

[Crap Throwing Monkey]

Thanks for the info. Wow...an answer to a simple question without juvenile bull sh--. Very nice!

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To a simple question you didn't actually ask.

[Fan in Chicago]

To a simple question you didn't actually ask.   

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Guess I am up to my usual jabbering without listening self

[TPS]

Oil's bought and sold using US dollars world-wide.  The current monetary policy is causing the dollar to strengthen.  Ergo, a dollar buys more oil on the spot market. 

 

And THAT, my dear cabbage-brained little dimwit, is how a sitting administration affects worldwide commodities prices.

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A stronger dollar means it purchases a greater amount of foreign currency, which means it affects the ability to purchase anything priced in another currency--a stronger dollar reduces the prices of imported goods from non-dollar countries. However, since oil (and other commodities) is priced in dollars, the dollar does not "strengthen" against its own value. The only way "a dollar buys more oil on the spot market" is if the dollar price of oil declines.

 

Also, "a sitting administration" does not determine the course of monetary policy, The FED does.

 

RkFast, if you want a good conspiracy as to how this administration could affect prices, I just came across a doozy:

 

Spot prices can be, and often times are, driven by futures prices. Many market players were making significant bets on continued increases in the price of oil and gasoline in the futures market, that is until August....

 

In June, henry Paulson, head of Goldman Sachs, was named Treasury secretary. In August, Goldman Sachs announced it was reducing its investment in gasoline futures to the tune of $6 billion (via a commodities index it trades to other investors). Other players shortly followed suit. I can think of a couple possibilities here:

 

1. A "conspiracy" to lower prices before the election.

 

2. Coincidently, GS decided to reduce their position in August because of changing market conditions--demand for gas falling and excess oil supply inventories.

 

 

This blogger raises the conspiracy issue, but the underlying facts of the market change by GS can be found in the article he has linked in his column.

futures gas price manipulation?

[GG]

What? Goldman Sachs now controls the gas market? Could it have been a tactic for them to try to profit from Amaranth's long position in gas futures? Could that have been a greater reason for going short on gas than Paulson's new job?

 

Your misunderstanding of the capital markets is frightening.

[TPS]

What?  Goldman Sachs now controls the gas market?  Could it have been a tactic for them to try to profit from Amaranth's long position in gas futures?  Could that have been a greater reason for going short on gas than Paulson's new job?

 

Your misunderstanding of the capital markets is frightening.

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first, I gave you a couple scenarios. I didn't say which one I believed (although I knew the conspiracy angle would ruffle some feathers... ).

 

Second, GS did not "go short on gas," they reduced their long position in the futures market by a significant amount, big enough to influence the futures price, and also start a move by other players in the same direction. Do you know what happens when there is a large sell off of futures contracts (hint: when you increase the supply of something, the price goes down)? And, when futures prices fall, that sets into motion a fall in spot prices.

 

Does that mean GS controls the gas market? Of course not. Can a significant player influence market prices in some markets? Hell yes. In fact, the NYME limits the amount of futures contracts one can purchase, in order to limit the possibility of market manipulation. In the case of GS, the futures contracts are part of their commodity price index (GSCI)** which they sell to other investors, so the NYME restriction didn't apply (it only applies to daily traders). By re-weighting their index though, that meant a sell off of the quantity of unleaded gas futures, the quantity of futures contracts which exceeded the NYME limits.

 

What it means is that the sell off by GS started a fall in futures prices (of unleaded gasoline), and other players followed suit, which continued the fall in futures prices, which led to a fall in the spot price. The question underlying this is, which isn't answered, why did GS decide to "re-weight" the amount of unleaded gas futures in their commodity index?

 

Amaranth's natural gas position had nothing to do with their re-weighting the GSCI. You are correct about one thing, someone has a "frightening misunderstanding" of markets...

 

** The GSCI is an index of 24 commodities, and GS purchases various types of commodity contracts which make up its underlying value. The amount of the contracts purchased for each commodity is determined by the weight (%) GS gives to each. These weights are not changed too often, because then the underlying value of the index has changed, which obviously influences the price of the GSCI.

[Fan in Chicago]

What it means is that the sell off by GS started a fall in futures prices (of unleaded gasoline), and other players followed suit, which continued the fall in futures prices, which led to a fall in the spot price.  The question underlying this is, which isn't answered, why did GS decide to "re-weight" the amount of unleaded gas futures in their commodity index?

 

Amaranth's natural gas position had nothing to do with their re-weighting the GSCI.  You are correct about one thing, someone has a "frightening misunderstanding" of markets...

 

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If the above is true, I wonder if GS just started something that would have happened anyway. Right now, long term supply-demand situation looks good and end product prices are likely to be off from their recent highs. Most likely, GS did an analysis and decided to start selling. Others hitched on to their analysis and actions and followed suit. Hence, I don't think GS tried to manipulate the market. If they were doing so, it would be at great financial risk which the market would punish accordingly. And GS is not that stupid.

[TPS]

If the above is true, I wonder if GS just started something that would have happened anyway. Right now, long term supply-demand situation looks good and end product prices are likely to be off from their recent highs. Most likely, GS did an analysis and decided to start selling. Others hitched on to their analysis and actions and followed suit. Hence, I don't think GS tried to manipulate the market. If they were doing so, it would be at great financial risk which the market would punish accordingly. And GS is not that stupid.

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Yes, that's what the second (and most likely) scenario implies--the market conditions were there to cause the price of oil to decline, which would then cause the prices of oil-related goods to start falling. It's a bit different in this case though. The GSCI is an index of commodity prices, but the "index" is created by purchasing underlying commodity contracts, the amount of which is based upon the weights that GS gives to each commodity. Every month, when contracts expire, GS will "roll over" the contracts to keep the underlying composition of its index intact. In August they announced they would reduce the weight of unleaded gasloline in their index (from about 8% to 2%) and redistribute the change to other energy commodities. In effect, they reduced their purchases of unleaded gas futures in August by $6 billion, and used the funds to purchase other (energy) commodity contracts, increasing the weights in those other categories.

 

Here's the rub: they created a product to sell. That product's value is determined by the weights of each product in the portfolio, which determines the quantity of contracts to purchase of each commodity, and the value of the contract itself. The GSCI is the sum of weight times the value of each contract. The GSCI is a derivative that GS sells to investors. The question is what determines the weights of each commodity? In this case, GS made a decision to change its product by changing the weight of an asset in the index. According to their web site, "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). Did the amount of unleaded gasoline consumption/production change recently to make GS change its Weight?

 

Again, by doing this, it reduced the demand (I had this reversed in the other post) for unleaded futures by $6 billion, putting downward pressure on futures prices, then, when other players got wind of this move, they sold off futures based upon the expected impact. The more I think about this, the more it raises the question of why they changed the weight.

[GG]

Here's the rub: they created a product to sell.

 

12 years ago!!! I take it Goldman Sachs was ok when it produced Bob Rubin & John Corzine.

 

Again, by doing this, it reduced the demand (I had this reversed in the other post) for unleaded futures by $6 billion, putting downward pressure on futures prices, then, when other players got wind of this move, they sold off futures based upon the expected impact.  The more I think about this, the more it raises the question of why they changed the weight.

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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.

 

And btw, closing out your long positions is tantamount to going short. But you knew that.

[Crap Throwing Monkey]

In effect, they reduced their purchases of unleaded gas futures in August by $6 billion, and used the funds to purchase other (energy) commodity contracts, increasing the weights in those other categories. 

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So what's the price action been on those other commodities the past five weeks?

 

Because I would presume, if Goldman-Sachs drove oil prices down by taking $6B out of the market, they drove everything else up by putting $6B into it.

[TPS]

So what's the price action been on those other commodities the past five weeks? 

 

Because I would presume, if Goldman-Sachs drove oil prices down by taking $6B out of the market, they drove everything else up by putting $6B into it.

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Yes, I was thinking about looking into that. Unfortunately, the article in the NYT doesn't state how they reallocated their weights. It did say "to other commodities," so they didn't pile it all into one area. And if market participants knew which areas, they would've been smart to jump on those futures too, creating the effect you mention.

[TPS]

12 years ago!!!  I take it Goldman Sachs was ok when it produced Bob Rubin & John Corzine.

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.

 

And btw, closing out your long positions is tantamount to going short.  But you knew that.

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Having just described how the weights are determined in my previous posts, and after going to the GS web site on the index, it does raise the question of why they changed the weight, which is supposed to be based on the proportion of unleaded gasoline's consumption/production in the economy.

 

Yes, I agree the market forces were there to cause the price of oil to fall, which would then cause gas prices to fall. This index change is not the same thing. Their decision added another factor to the falling price of unleaded gas, and a factor that could immediately impact prices.

 

As my last posted stated, they closed out the positions by not "rolling over" the contracts--not buying new ones to maintain the composition of their index. That drained $6 billion out of the unleaded gas futures market on the NYME.

 

While you are correct that closing out a long position occurs when one offsets it with a short, that is not the same thing as taking a short position. One only takes a position when it is "open." but you already knew that....

[Crap Throwing Monkey]

Yes, I was thinking about looking into that.  Unfortunately, the article in the NYT doesn't state how they reallocated their weights.  It did say "to other commodities," so they didn't pile it all into one area.  And if market participants knew which areas, they would've been smart to jump on those futures too, creating the effect you mention.

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So your knowledge of the reweighting of the GSCI is based on a single NYT article written six weeks after the reweighting?

 

If you don't even know the components of the GSCI, but claim to know that the readjustment of a single component of the GSCI adversely affected a single commodity market, I'd have to consider your hypothesis specious, at best.

[GG]

News scoop I read today on the bathroom wall!!

 

Publishing giant McGraw Hill did not remove Heinz & Co. from the S&P 500 list 2 years ago, proving that the media is unabashedly liberal.

[GG]

Yes, I agree the market forces were there to cause the price of oil to fall, which would then cause gas prices to fall.  This index change is not the same thing.  Their decision added another factor to the falling price of unleaded gas, and a factor that could immediately impact prices.

 

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No, we are talking about the factors that would cause gasoline prices to fall. Oil prices would face a bit of a counterbalance for the rising demand for heating oil.

 

More supply of gas & less demand for gas was the reason for the reallocation.

 

Here's a question. Who do you think GS traders are more loyal to, Paulson or their commission check?

[Fan in Chicago]

No, we are talking about the factors that would cause gasoline prices to fall.  Oil prices would face a bit of a counterbalance for the rising demand for heating oil. 

 

More supply of gas & less demand for gas was the reason for the reallocation.

 

Here's a question.  Who do you think GS traders are more loyal to, Paulson or their commission check?

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I agree very much with most of your above points save for the one on heating oil. Heating oil produced, as a percent of crude oil inputs, is miniscule compared to gasoline and diesel. Hence, heating oil demand will have to rise by an order of magnitude to have this counterbalancing effect. Also, the supply situation of heating oil is not too tight (in fact there is global over capacity and refiners routinely re-configure their sites to reduce its production). Finally, I don't see any reasons for heating oil to sustain its upward momentum (if there is one) on a long term basis.

[GG]

I agree very much with most of your above points save for the one on heating oil.  Heating oil produced, as a percent of crude oil inputs, is miniscule compared to gasoline and diesel.

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That's why I said a bit The drop in gasoline futures was far greater than the drop in oil futures.

[TPS]

So your knowledge of the reweighting of the GSCI is based on a single NYT article written six weeks after the reweighting? 

 

If you don't even know the components of the GSCI, but claim to know that the readjustment of a single component of the GSCI adversely affected a single commodity market, I'd have to consider your hypothesis specious, at best.

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Boy you guys sure like to stretch my arguments...

 

I never said I didn't know the components of the GSCI. I actually went to the GS web site and found and posted the information on how they determine the weights--and their site has all of the components and weights listed. Maybe I wasn't clear enough. I did state that market forces were aligned to push prices lower, but this particular "adjustment" also helped speed the process, especially after other market players found out about the adjustment.

 

The article from the Times (did you read it?) is an objective business piece much like you'd find in the WSJ. There are no hints of conspiracy there (the blogger link, yes). The article, quoting industry traders and GS announcements, makes the case that this readjustment helped reduce unleaded gas prices. Based on the GS web site and their own words on how they determine the weights, the change they made in August is inconsistent with their explanation of how the weights are determined. Google GSCI and you can find the gold sach's link.

 

But of course, your usual counter-argument is that it's a NYT article. Gee, how can anyone argue against that point. It does serve you well though...

[TPS]

No, we are talking about the factors that would cause gasoline prices to fall.  Oil prices would face a bit of a counterbalance for the rising demand for heating oil. 

 

More supply of gas & less demand for gas was the reason for the reallocation.

 

Here's a question.  Who do you think GS traders are more loyal to, Paulson or their commission check?

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Did you read the quote I posted from the GS site on the GSCI index and how the weights are determined? Your explanation makes no sense based on the gold sach explanation.

 

Your question on GS traders is irrelevant to the issue unerlying the change in the weight for unleaded gas in the GSCI index. This change is analogous to the DJIA making a change in the composition of the stocks contained in their index. They only do so when the structure of the economy has changed. so they need to add companies to the index that reflect the changed structure of the economy. Traders don't change the index, but you already knew that...

[Crap Throwing Monkey]

Boy you guys sure like to stretch my arguments...

 

I never said I didn't know the components of the GSCI.  I actually went to the GS web site and found and posted the information on how they determine the weights--and their site has all of the components and weights listed.  Maybe I wasn't clear enough. I did state that market forces were aligned to push prices lower, but this particular "adjustment" also helped speed the process, especially after other market players found out about the adjustment.

 

The article from the Times (did you read it?) is an objective business piece much like you'd find in the WSJ.  There are no hints of conspiracy there (the blogger link, yes).  The article, quoting industry traders and GS announcements, makes the case that this readjustment helped reduce unleaded gas prices.  Based on the GS web site and their own words on how they determine the weights, the change they made in August is inconsistent with their explanation of how the weights are determined.  Google GSCI and you can find the gold sach's link.

 

But of course, your usual counter-argument is that it's a NYT article.  Gee, how can anyone argue against that point. It does serve you well though...

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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.