The Oil Drum

13 comments on A gentle cough in the direction of the NYT

Comments can no longer be added to this story.

Oil Trader on November 30, 2005 - 12:34am

The market is so short sighted.

Because stocks have built over the last couple of months they think there is an over supply. This neglects the fact that the IEA released 2mbpd of oil and product onto the market but as long as this happens the party can continue.

There has been some discussion here about the ability of the market to predict the future. It cannot it is driven by greed and fear. When you have a large number of people doing something the market finds the middle ground. ie the Average which turns out to be fairly stupid. But this means it can proved some good buying opportunitys:)

From the TOD top right of the page which can be applyed to the futures market

"We have only two modes - complacency and panic."
--James R. Schlesinger, the first energy secretary, in 1977, on the country's approach to energy

"Of all races in an advanced stage of civilization, the American is the least accessible to long views. . . . Always and everywhere in a hurry to get rich, he does not give a thought to remote consequences; he sees only present advantages. . . . He does not remember, he does not feel, he lives in a materialist dream."
--Moiseide Ostrogorski (1902, 302-303)

The one that best describes the futures market simply replace citizen with trader:)

"So one may almost say that the theory of universal suffrage assumes that the Average Citizen is an active, instructed, intelligent ruler of his country. The facts contradict this assumption."
--James Bryce (1909, 35)

The price of the futures in no way reflects what is going to happen in the future. It shows what the "average" trader thinks will happen.

Comments can no longer be added to this story.

Halfin on November 30, 2005 - 2:21am

The reason these comments about the market are not correct is that if markets worked that way, anyone with some common sense could become rich by investing in futures markets. All you have to do is to look ahead and find a case where the futures price is way off from what you are sure the spot price will be at that time. Take a position in the market based on that difference. The market price must converge to the spot price as the contract expires. If your prediction were right, you'd make money.

Yet we know this doesn't work. Most people don't succeed in the futures market. It is not an easy road to riches.

I believe that the reason is because the story about bad market predictions is wrong. Actually, markets predict very well, on the average. They may be too high sometimes and too low other times but you can't tell which. There is no safe and easy way to say whether a given market prediction is too low or too high. If there were such a way, people would exploit it to make money, and by their actions they would correct the mistake.

That's the great thing about markets: when they're wrong, you can get rich. And by doing so, you make them right. No other institution has this property. Polls and surveys certainly don't, nor do predictions by experts or interested parties. Markets are fundamentally different from polls. They have self-correcting properties which make them the best institutions we have for making predictions.

Comments can no longer be added to this story.

TI on November 30, 2005 - 4:30am

Markets are for allocating resources, they are not for predicting anything. They may seem to predict because they can sometimes feel weaker signals of something that is already going on. But this is not really predicting. If the economy has started to weaken the companies adjust their expectations and plan to purchase a little less oil in the future and this shows in the markets. But the markets only react to the changing conditions, they do not predict them.

The markets did not predict the US oil peak, nor the North Sea oil and gas depletion. They will set price for the supply and demand to meet, always.

Comments can no longer be added to this story.

mikeB on November 30, 2005 - 6:48am

They may seem to predict because they can sometimes feel weaker signals of something that is already going on.

They also seem to "predict" because marketeers use fallacious "observational selection" in the way they interpret the market.

Another term for this is "filtering." Basically, with any predictions you want to trumpet, you highlight the "hits" and ignore the "misses."

Markets aren't merely "short-sighted." They're reactionary.

Comments can no longer be added to this story.

NC on November 30, 2005 - 10:15am

The problem in trying to use market trends to predict the future is this.

Not all players in the market have the same goals or the same amount of cash to invest. A small minority of people, controlling a significant amount of money, can move markets in order to make a profit. A lot of money has been made just selling when prices go up and buying when prices go down. Far seeing, well informed, sustainable minded people are going to loss their shirts in this environment if they can't hold onto investments for years (at no cost) to realize a change in price.

The market has no interest in what the long term scarcity of the resource will be. Traders make money off of choppiness not long term trends. The money has to cycle in and out with profitability on each trade. You have to sell to make a profit. Buying and holding doesn't make you any money. It doesn't matter if the long term trend is up or long term trend is down. As long as there are short term spikes and dips there is profit to be made on relatively short term trades. Consumers don't have this luxury. They only buy once, hopefully at the lowest price they can get.

IMHO this short term choppiness of markets tends to mask all real trends of scaricity of commodities unless a graph of long term (always more than 12 months) is used to put things in perspective.

Comments can no longer be added to this story.

CassandraOil on November 30, 2005 - 3:55am

My dear OilTrader, there are many irrational markets in the world (the real estate market in the US just now is a very good example of a market in a pique of irrationality) but crude oil is behaving very rationally at the moment.

Supplies are up relative to demand. Prices are falling. It is a correction in the upward trend. OPEC wants to sell. I pull up at the local gas station and want to buy. Everyone is happy.

Yes, your criticism is of "futures" prices, by which you mean prices for crude oil not in December or January but perhaps March or June.

But those prices are led about by the current price as a horse is by its bridle. The most fear or greed can add or subtract is a dollar or two.

Whatever Mr. Halfin may say about the matter, you and I both know that anyone buying June 2006 crude oil at the current price of $59 is going to make money so long as he or she can hold till delivery.

And 2011 crude at $52? Well now, that is irrational.

Comments can no longer be added to this story.

LevinK on November 30, 2005 - 1:04pm

you and I both know that anyone buying June 2006 crude oil at the current price of $59 is going to make money...

You can not know that. It is the price of risk that stops people from speculating largely even though the supply/demand equation is close to clear.

Comments can no longer be added to this story.

Atticman on November 30, 2005 - 11:37pm

We have new summer driving season and hurricane season coming soon to a theater near you.

Comments can no longer be added to this story.

LevinK on December 1, 2005 - 4:00pm

:)
Yeap, what this means is that maybe with 90% confidence I could say that price will go up. But with how much? And how do you know that it would be in these 90% not the 10% left?

Now look at the market. Maybe 80% of the futures deals are an insurance against future price volatility. If speculators (20%) manage to influece the price significantly (say futures go to 100$/barrel) the spot price will also grow to say 95$ (because it would become cheaper to buy now and store until maturity). But at 95$ there would be a disbalance because producers would not be able to clear stock and storing crude would cause huge loss, consequetivly both prices will drop. It turns out that the marginal barrel matters for the futures price, and only a major change in market expectations can change that.

In short I believe now is a good opportunity to become a speculator... anybody know how I can participate?