GET PISSED: all sources are DOE unless otherwise stated; trading data from Investors Business Daily, Margins from NYMEX.
The price of unleaded gasoline delivered to NY Harbor on the 14th of April was $1.38 per gallon, down more than thirty cents per gallon in ten days. Saturday, the 16th of April, as I was driving around LA, I found that the price had gone up another cent per gallon and was selling between $2.69 and $2.62 per gallon. One station had it for $2.57. We pay $.36 per gallon in taxes so the price at the pump (2.62-.36=$2.26 per gallon) is $.88 cents over the cash. The usual spread over the years has been between five and nine cents. We are getting fucked. We don’t have free market capitalism in the fuel market. Even though there are 24 oil companies in the U.S. There are fewer than ten retailers, all owned by a parent refining company. Consider that our consumption of gasoline is about four hundred million gallons per day. Multiplying that by $.88 means the companies are making around three hundred and eighty million dollars per day, or around 11 billion per month. BUT we have to keep in mind there are transportation costs, taxes, profit margins, the demands of mistresses to be considered. Now I don’t know what a normal profit should be but I repeat: the normal spread between cash and pump is between five and ten cents, not eighty eight cents.
Pissed enough? If you ain',t you're a Communist hoping the oil companies will teach capitalism a lesson it will never forget.
So, to the Markets
Question: does the cash follow the futures or do futures follow the cash? The answer is that futures follow the cash, USUALLY. This means that on occasion the futures markets can cause cash prices to soar---or collapse--- for no other reason than the contagious quality of fear, which is to speculation as lying is to the MSM.
First, we need to take a look at crude oil, which has been up on pure speculation. How is this possible with all the exchanges having position limits, which means you cannot hold more than a specific number of contracts; in theory this rule that means that nobody can corner a market. Question then arises, and one I have asked over and over on this site, how the hell does this speculation happen?
Could God be involved?
First let us look at how easy it is to rig the futures markets---if you have enough money---and it doesn't take much in these markets. Stocks trade in excess of two billion shares per day; gasoline futures trades under 80,000 per day and crude oil about 300,000 contracts per day. The value of stocks traded each day is said to be in excess of two trillion dollars, gasoline and crude together have a value of just six hundred million dollars. Futures are a joke. The argument is often made that you have to multiply each oil or gasoline contract by the number of units within the contract: 1,000 (bbl or 42,000gallons) to get the correct amount of product traded. I disagree. You trade what is there. You cannot make the argument that a futures contract on the S&P 500 has to be multiplied out, or treasury bonds have to be multiplied out. You trade the unit that is there. The margin required (cash you put up to trade each contract) is the biggest joke going: $3,500 controls $500,00 $1,200,000 worth of crude oil (at $50 per barrel). This allows these guys to go crazy. The “rumor” per Larry Kudlow is that the margin for large speculators is $1,400.
So here we sit with a small market, ready for picking by big money.
Enter the force called “Managed Futures.” These are like mutual funds in that they have huge amounts of money for trading, not in the two billion share Stock Market, but in these small futures markets. All of the managed funds will gobble up the maximum number of contracts allowed by law; 350 crude contracts and 150 gasoline contracts. Consider that there are around 2,100 managed futures funds, but the NYMEX reports indicate only around 131 large specs with a hundred more not reporting in unleaded gas; plus at least 222 (times the limit of 350 equals 77,000 contracts) sum in crude and you can see the potential. [below is the crude Commitment of Traders report from the CFTC] The problem arises because all of managed funds trade on the same technical data. They all get the same signals at the same time as well as the same info. As a result you have these massive movements. (Go here for hedging) A note here: the futures traders are really sharp, not like the Mutual Fund dopes. There is no way they are going to stay in a market that is going south.
What has happened over the past ten days is that all of the managed futures funds reacted to the same signals and shorted the market. Once the market started to fall they dumped everything and went short the entire market.
Unleaded gasoline has a total volume of 80,000 (136,000 contracts total open interest). This means that 80,000 times the contract spec: 42,000 gallons; this means that only 336 million gallons of gasoline is traded on the NYMEX in New York each day [vs consumption of four hundred million]. The total number of contracts outstanding on all months stretching out to December of 2009 is 850,000 contracts. I don’t have data for London, Frankfurt, Paris, and Tokyo but seems logical to infer similar volume, but it is said that the U.S. uses 40% of the fossil fuels consumed right now.
The total open interest (contracts either long or short) on both crude and unleaded gasoline at the New York Mercantile Exchange was just over 600,000 contracts. I didn’t calculate beyond four months because those distant contracts represent hedges against God only know what.
Consider that the NYSE and NASDAQ are trading in excess of two BILLION shares each day; consider most trades are in 100 lots, and you are left with twenty million contracts buys and sells. Big difference between 130,000 gasoline contracts and 20,000,000 hundred lots. AND---You cannot buy stocks by putting up .007 the value of the stock as you do in crude. You have to put up 50%, and that is what stops the really rich from doing in the market. The low margin plus a gang of rich funds is how this energy speculation could take place. Too much money chasing too few contracts. Will it happen again? Would Paris Hilton make a porno?
Reply to many emails: The May futures is higher than the cash right now and that is normal. Eventually the cash and the futures will be the same on expiration; either the cash rises to meet the futures or the reverse. May contracts expire at the end of April.
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Some Right Wing bullshit exposed: Refinery capacity has gone up since 1991 not down; capacity per operating refinery increased by 28% over the 1990 to 1998 period. The number of refineries has dropped from 324 to 149 since 1981 BUT all of those were smaller or inefficient refineries, had serious pollution problems, or were so old that maintenance costs were prohibitive without price the price supports described below. Additionally, in 1981 the refineries were operating at 67% capacity and most were losing money on their operations. However refinery capacity has increased 28% since 1990 as the majors expand operations. Refineries now operate at 90% capacity. Something we have all forgotten is that there were price controls in place until 1981. These price controls acted as a subsidy for both good and bad refineries. No subsidy means that no inefficient business can exist.
There are 24 major energy companies that refine product. They include Kerr McGee Marathon, Frontier, Holly, Devon Energy, ConocoPhillips Citgo/PDV America, Utramar, Diamond Shamrock, Koch Industries, Premcor Tesoro Petroleum, Valero Energy, Phillips Petroleum, ExxonMobil, Royal Dutch Shell, ARCO, Unocal and a few others. Even so, the suspicion exists that they fix prices and there is no true competition.
Go here for details on traders in market. LOL reading the Goddam thing.
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