Rising Gas Prices

[WhatMoney]

Personally they should have to pay 100% in my opinion. Though I appreciate you correcting me , I thought commodities was 50% too. I mean if I go to wal mart and fill the basket, I can't pay 50% and walk out with it , same at McDonald's, Hardee's, Lowe's, etc . So why should they be allowed to not actually buy the product they are getting?

You are not understanding Futures contracts and margin requirements. Nobody pays 50%, or 7% for the actual commodity. A Futures contract has a high leverage through the margin requirement; one oil contract buys or sells 1000 barrels of oil, but you don't pay the cost of 1000 bbl unless you take delivery. Speculators always do a counter trade to zero out their holdings before selling or taking delivery of the commodity. I don't want 1000 barrels of crude oil delivered to my front porch on settlement date.

Margin only determines how many contracts you can buy - it is cash required in your Futures trading account, and margin requirements are determined by risk and volatility by each Futures exchange. The higher the margin, the more cash you need to buy or sell contracts. Raise the margin and speculators need more cash to control the same number of contracts. So it becomes more expensive if you are a speculator if margin is raised.

The producers can sell their products, like oil, and the oil companies, the refiners, can buy this oil on the spot market, which is a cash market. They pay whatever price the spot cash market is at the time. Or they could sell and take delivery of the underlying asset through a futures contract upon expiration. Or some combination of both.

The Futures market price closely tracks the cash market, with a small time and risk premium. A Futures contract is an agreement to buy or sell a commodity at some future date at a particular price, determined by what you initially bought or sold the contract for. Margin is the amount of cash one must keep in an account to protect the Futures exchanges against possible loss. Farmers sell Futures contracts on a crop to hedge against a future price drop when their crop is ready. When the contract is settled there is physical delivery from the farmer (who sold a futures contract) or a cash settlement. They could use the Futures as only a price hedge and sell their crop in a cash/spot market at any time, or actually deliver their crop when the contract expires. Without low contract margins their would be no attraction for the Futures market and the smaller producers would not be able to participate.

I cannot possibly explain the Futures market in less than 50 pages - you need to understand both the early history and how it has evolved into the derivative speculation market of today. But here is a good introduction - a clearer and more orderly explanation that I could possibly write up from memory:

http://www.investopedia.com/universi...es/default.asp
.

[JRScott]

No, all commodities are highly leveraged, with margins in the 2% to 15% range today. Oils run around 7% margin. 50% down is for most stocks. Increasing margins for oil will just send the business to other futures exchanges around the world - so it will not happen in the US. Restricting oil trading to commercials taking delivery would be a better solution. But then the hedge funds run by the US banks would cry - with their subprime losses they need some way to get back the money.

Personally they should have to pay 100% in my opinion. Though I appreciate you correcting me , I thought commodities was 50% too. I mean if I go to wal mart and fill the basket, I can't pay 50% and walk out with it , same at McDonald's, Hardee's, Lowe's, etc . So why should they be allowed to not actually buy the product they are getting?

[WhatMoney]

A comment from 'pit trader':

If "over 70% of the oil price is made up of speculation" why are total non-commercial long positions at the NYMEX 21.8% while non-commercial short positions at the NYMEX are 21.9%,? That is straight off of the CFTC Commitment of Traders report as of 6/17. Furthermore there is a delivery mechanism that links that speculative activity directly to the cash market (the "true" market) with the threat of delivery of oil in a pipeline at the hub in Cushing, Oklahoma. Shorts make delivery to longs. If the "true value" was lower the physical delivery process would reflect that value. Rather than doing that what the world saw during most of this price increase was that the expiring oil contract traded at a premium to the following contract months, which by the way is a signal of future price increases because people wanted the oil in the here and now to sell rather than store the oil for financial gain. As to the long hedger he or she is buying "paper barrels" that do not have an immediate price effect, that effect hits the market over time and usually at a lesser amount than if the barrels had not been hedged. It is also notable that oil is priced in US Dollars and we all know what has been happening to the Dollar.

Rep. Dingell is a Dingellberry.

[WhatMoney]

All commodities other than oil require 50% down, oil only requires 5% down.

No, all commodities are highly leveraged, with margins in the 2% to 15% range today. Oils run around 7% margin. 50% down is for most stocks. Increasing margins for oil will just send the business to other futures exchanges around the world - so it will not happen in the US. Restricting oil trading to commercials taking delivery would be a better solution. But then the hedge funds run by the US banks would cry - with their subprime losses they need some way to get back the money.

[BankruptPinoy]

[AngelinaCat]

$2.00 gas prices would be van glorious!

I HEARD that loud and clear!

As I drove in to work today, I noticed that the 10 to 12 cent spread between gas stores has tightened up a bit. Of the two 'cash onlys', one was $3.99 for unleaded, and the other at $4.02. The Citgo across the road was at $4.05. The Chevron where I gassed the other day was at $4.00, and the place closest to my employment was at $3.96. I filled the tank there yesterday when it was at $3.94, for a whopping total of $50.12.

[HRx]

$2.00 gas prices would be van glorious!

[JRScott]

Oh I agree there is no short term fix. All commodities other than oil require 50% down, oil only requires 5% down.

Yep in the 1970s we talked about this during the last gas crisis , we didn't learn to good. In truth its gonna wreck our economy, but we might actually get some refineries built and new oil wells domestically if it stays high long enough.

Anyone that tells you there is a short term fix is lying. Increased oil production/refinery will take 5-10 years. Affordable hybrids to reach the poor will take around 15-25 years. Alternative fueled cars like hydrogen fuel cells will take between 30-40 years to have the infrastructure and cost down enough for the poor to afford.

[epiphany]

However the price of oil is only about 15-20% speculation. The rest of it is the lack of oil and refineries in the world to meet demand.

There is no lack of oil. We have more of it than those that we buy it from. We are just not allowed to access it due to state regulated environmental laws.

I believe that speculation plays a much bigger part in this than you have credited it. And it's not just oil. It's all commodities. Gold, Silver, Copper prices are going through the roof. And for what? Because people are gaming.

The Saudi's are willing to increase supply to help meet the demand and lower costs. Why? Because they are scared that we, and other nations, are going to explore other options and possibly come up with oil alternatives or start tapping our own supply. This would make us no longer reliant on them and their economy would take a huge hit.

Again, there is no lack of oil. Just the decisions of oil owners to control the production volume in order to regulate the pricing.

There are definitely not enough refineries in the US...(and building them would probably take a decade) but our politicians knew, or should have known where we were headed, and should have thought of this a long time back. There was plenty of talk even 30 years ago.

This is not going to be fixed anytime soon but it is coming to a head. The marketplace cannot sustain this for much longer.

ep

[JRScott]

All they need to do is require that oil speculation require 50% down at time of purchase like all other commodities.

However the price of oil is only about 15-20% speculation. The rest of it is the lack of oil and refineries in the world to meet demand. I've written mine to try to get us to use our own God given resources.

[BankruptPinoy]

Gasoline prices could go down-Will it help to call your congressman?

Shut down their phone lines and internet lines!

Here's a sample letter:

"To (your senator/congresscritter)

In the name of saving our country, I respectfully insist that you introduce/back legislation which will restrict the national oil speculation markets. Recent government reports have concluded that if congress would act to limit the speculation of oil, the price of a barrel of oil would fall to roughly 60 dollars a barrel, and gas would fall to about 2 dollars a gallon!

Michael Masters of Masters Capital Management testified to the House Energy and Commerce Committee about this exact matter, as did Fadel Gheit of Oppenheimer and Co., Edward Krapels of Energy Security Analysis, and Roger Diwan of PFC Energy Consultants.

Please seriously consider the matter. For a link to a MarketWatch.com article on this story, please click below:

http://www.marketwatch.com/news/story/gas-could-fall-2-if/story.aspx?guid=%7B2673C102-68E0-41D9-9C9A-10EE2E723948%7D&dist=msr_13

Thank you,
(your john hancock)"

Write Your Representative

https://forms.house.gov/wyr/welcome.shtml

Senators of the 110th Congress

http://www.senate.gov/general/contact_information/senators_cfm.cfm

[BankruptPinoy]

Gas could fall to $2 if Congress acts, analysts say
Limiting speculation would push prices to fundamental level, lawmakers told

WASHINGTON (MarketWatch) -- The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.

Testifying to the House Energy and Commerce Committee, Michael Masters of Masters Capital Management said that the price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135.

Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants agreed with Masters' assessment at a hearing on proposed legislation to limit speculation in futures markets.

Krapels said that it wouldn't even take 30 days to drive prices lower, as fund managers quickly liquidated their positions in futures markets.

"Record oil prices are inflated by speculation and not justified by market fundamentals," according to Gheit. "Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel."

Futures trading in London has not been a major factor in rising oil prices, testified Sir Bob Reid, chairman of the Chairman of London-based ICE Futures Europe. Rising prices are largely a function of fundamental supply and demand, not manipulation or speculation, he said.

"Energy speculation has become a growth industry and it is time for the government to intervene," said Rep. John Dingell, D-Mich., chairman of the full committee. "We need to consider a full range of options to counter this rapacious speculation." It was Dingell's strongest statement yet on the role of speculators.

Dingell introduced a bill on June 11 that would ask the Energy Department to gather the facts on energy prices, including the role played by speculators.

There are two kinds of speculators in the futures markets, Masters said.

Traditional speculators are those who need to hedge because they actually take physical possession of the commodities. Index speculators, on the other hand, are merely allocating a portion of their portfolio to commodity futures.
Index speculation damages price-discovery mechanisms provided by futures markets, Masters added

The committee will likely consider legislation that would rein in index speculation by imposing higher-margin requirements; setting position limits for speculators; requiring more disclosure of positions; and preventing pension funds and investment banks from owning commodities.

Both major presidential candidates have supported closing loopholes that encourage speculation in the energy markets.

However, other witnesses said that pure speculators have had little impact on energy prices, which have doubled in the past year to about $135 per barrel. Both Treasury Secretary Henry Paulson and Energy Secretary Samuel Bodman have dismissed the impact of speculators on prices paid by consumers.

Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman of the investigations subcommittee. Stupak introduced a bill on Friday that would limit index speculation.

There has been much discussion recently about how big a role speculators have been playing in the sharp rise in energy prices, though no consensus has emerged on this point.

Congress, however, has grown increasingly concerned over speculative investors' role in the energy market in comparison with those buying futures contracts to hedge against risk from price changes. Lawmakers are expected to consider legislation to set strict limits -- or in some cases, an outright ban -- on speculative trading in energy futures in some markets.

Dingell is looking into any legal loopholes that may have contributed to speculation in energy markets. In 1991, according to documents provided by the Commodity Futures Trading Commission to the committee's investigators, the agency authorized the first exemption from position limits for swap dealers with no physical commodity exposure. This began what Dingell said was "a process that has enabled investment banks to accumulate enormous positions in commodity markets."

Is Congress barking up the wrong tree?

Neal Ryan, manager at Ryan Oil & Gas Partners, said that if Congress develops regulations to cut back speculative trading, speculation will just find a new home.

"Speculation is the root of capitalism," he said. "If the speculation is forced out of the U.S. exchanges, it'll simply show up on other exchanges that are OTC like the ICE, or new exchanges will pop up to allow for the spec trades to continue functioning."

Ryan said he does see a reason for Congress to look at eliminating aspects such as allowing West Texas intermediate crude oil futures to trade on foreign markets and the "Enron loophole," but "these exchanges are currently functioning as they are supposed to in a free marketplace."

The creation of a comprehensive U.S. energy policy that tackles issues of increasing domestic supply and reining in consumer demand via conservation should be Congress' focus, Ryan said. "Instead we're on bended knee begging the Saudis to put more oil on the market and talking about shutting down spec trades."

http://www.marketwatch.com/news/story/gas-could-fall-2-if/story.aspx?guid=%7B2673C102-68E0-41D9-9C9A-10EE2E723948%7D&dist=msr_13

[HRx]

I posted this 'gas price finder' back on page 39. I thought I would post it here again for convenience. Just type in your zip code to find the gas price ranges in your area. It is supposed to be updated every 24 hours. But not everyone reports in on a timely basis. And I find that the two 'cash only' stores that I've mentioned, aren't listed at all.

http://autos.msn.com/everyday/gassta...?zip=&src=Netx

www.gasbuddy.com is a good source. But keep in mind that the prices may not be 100% correct since they are updated by consumers.

[AngelinaCat]

I posted this 'gas price finder' back on page 39. I thought I would post it here again for convenience. Just type in your zip code to find the gas price ranges in your area. It is supposed to be updated every 24 hours. But not everyone reports in on a timely basis. And I find that the two 'cash only' stores that I've mentioned, aren't listed at all.

http://autos.msn.com/everyday/gassta...?zip=&src=Netx

[AngelinaCat]

Today, as I drove through town, I observed that prices for unleaded gas in our area had dropped anywhere from 1 or 2 cents to 10 cents at one place. Of the two 'cash onlys', one was $3.98, the other still at $4.05. The Citgo across the road was still at $4.09. But other places near where I work, range anywhere from $3.94 to $4.04. Diesel is still averaging around $4.71.