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14 comments on Rigzone: NG may hit $15 by year end, analyst says some areas "will likely see gas lines"

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reno on September 1, 2005 - 4:35am Permalink | Subthread | Comments top
Hey MW, I'm curious about future traders and have a quesiton. Are future traders to blame for the high price of gas?? I have various discussions with people and some say oil companies are not to blame as they just sell and buy from the futures markets.. True or not?? I would like to know..
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mw on September 1, 2005 - 4:52am Permalink | Subthread | Parent | Comments top
I'm going to talk more generally about hedging and speculation - it applies to gas, NG, oil, cotton, whatever. But lets first not blame this on the oil companies... there are plenty of oil production companies that have no "gas pumps".... people are buying their 70$ barrels of oil as readily as Shell and the other integrateds buy and sell theres. The overall issue is demand, which is the supporting backdrop that allows the market to lean back on rising support (of price).

Hegding does influence prices, but most oil companies are hedging against DECLINES in prices, which means they are SELLING future contracts, in order to lock in gains.

When there is more SELLING pressure than BUYING pressure, prices go DOWN.

That's a bit simplistic, but in general, we could probably walk away assuming that hedging programs by oil and gas PRODUCERS are not themselves pushing prices higher.

Lets not forget there or hedgers on the CONSUMING side.

Refiners,
Airlines,
Industrial users,
Fuel wholesalers,
etc.

Most of the big users of petro-chemical / fuel products have hedging programs - they are buyers, and are protecting againt price increases - the other side of the coin.

And then, somewhere in the middle of all this, you have speculators.

There are those that try to identify the impact of the pure speculators -- those that will never take delivery of the product and are there just because its a big market to trade -- but surely there is far more speculative activity now than five years ago.

My take is they do add something to the price premium but I rather doubt they are as big a factor as some think. Regardless... it doesn't matter... price is the price. WHen it gets too high, according to the concensus of the herd, sellers come in and price heads lower. And vice versa.

The last few years various reasons (other than the obvious) have been given for why price has continued to trend higher and in my view, none of them are satisfactory. First it was the terror premium. Then Iraq. (not these are almost never talked about these days).

The only one that really makes sense is supply and demand, and the expectation that the balance is getting tighter. If these are not the peak oil times, its a good preview of what it will look like.

In the short term -- news often creates "spikes" and this price increase may be a short term spike and the high of the year, soon to come down... but only if they get substantially all the refineries back on line quickly.

(or a fleet of gasoline-laden supertankers shows up on our doorstep asap)

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coffee17 on September 1, 2005 - 8:10am Permalink | Subthread | Parent | Comments top
Here's a possible way to consider how speculators affect the market. If a speculator makes money, it's because they were right in predicting if the price was going to go up or down. When they placed their wager, they influenced price a bit, in the direction that they bet it was going to go. Since prices in the spot market eventually moved in that direction, this had a stabalizing effect on the price (preventing a sharp spike, which might have over shot the sweet spot).

When speculators lose money, it's because they bet in the wrong direction and thus were a bit of a destabalizing effect upon the price. In short, one can rationalize it as if speculators are making money they are actually providing a bit of a service to society. If they're not making money they're providing a disservice. But the people who continue to speculate are going to be the ones who haven't lost their investment money, and thus for the most part speculators are a good thing.

thoughts/comments/corrections?

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14 comments on Rigzone: NG may hit $15 by year end, analyst says some areas "will likely see gas lines"

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