Oil in Tankers--Traded as Many as 17 Times Per Month

Oil down another $5, How come? A drop of nearly $20 in less than a week. It must be the speculators. No evidence, but what the hell.

Oil is not all that different from other ag commodities in that there is supply in the ground (corn, beans, etc.); there is also corn that has been harvested and corn in storage (surplus). An October harvest may be traded a thousand times between planting intentions and delivery to consumer. The trades are made as the perception of harvest is matched with the crop in storage, together with the anticipated demand from foreigners. This kind of trading has been going on for 150 years and everyone benefits: farmers, processors, seed companies, and so on because the price is always known and people can plan ahead with a certain assurance of costs and profits. So it is with oil, only that the oil in the ground is traded as far out as ten years based on all kinds of factors (proven reserves) and is also traded for the forty five days or so that it is on tankers bound for everywhere. Keep in mind that oil in the ground, unlike growing crops, is impervious to droughts, blizzards, and floods. It goes without comment that if there is a revolution in an oil producing country that shuts down production, all oil above the ground everywhere will go up in price til demand is shut down. Similarly if a new field with proven reserves is found the prices for the "out months" (to 2016 and beyond)" oil that represents projected supply, will suddenly drop. That drop will be reflected in all months, even the cash month, because buying patterns will adjust for projected new supply.

Once oil is harvested and goes aboard a tanker (or local refinerey) the trading is in unimaginable quantities in off exchange trading as well as in world wide futures markets. This trading never ends, with delivery month simply settled or actually delivered. It takes weeks for a crude price to be reflected in the cash markets because if tanker A is transporting oil that cost $100 per barrel when taken from the ground is only worth $80 per barrel when delivered to New Orleans somebody has to eat the $20 difference. That somebody is the speculators in futures markets where the oil can be sold in the "future" at a price.

So these new prices, if they hold, will represent a new floor and ceiling for future prices. Til prices change again. The actual elapsed time between harvesting crude and putting the resulting gasoline in a retail gas station is between three and six months (a little faster these days) due in no small part to the array of local pollution requirements that constantly change. Prices have started to drop in anticipation of lower crude for several more months, at least. Gasoline prices drop in response to competition. They rise in response to cost of crude. Pretty good piece from the EIA is here.