Friday, December 12, 2008

Oil price decline

One thing to bear in mind about oil prices right now is that their decline has to do with more than just supply and demand. Part of it's the consequences of speculation. Speculators don't intend to take delivery of the oil they're buying contracts for. They plan on selling those contracts to someone else before they have to take delivery. They've no arrangements or facilities for actually accepting delivery of the oil if it ever reaches it's destination while they own the contracts. And the costs of parking a supertanker while you wait for a buyer are ruinous. Ports and shipping companies don't like having anchorage space and ships tied up idle, so they punish those who leave ships just sitting there doing nothing. All of which means that, as speculators near the delivery date on their contracts, they have to sell. At any price. Even if it means selling at a loss, because the alternative is an even bigger loss that just might wipe them out completely. That's causing prices to go down further than they otherwise would, as all the speculators get squeezed. Once the speculators are out of the market, expect the price of oil and gas to rebound somewhat.

No comments: