# Why did the price of oil drop?

Discussion in 'Business & Economics' started by desi, Aug 16, 2008.

1. ### desiValued Senior Member

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If the US is still causing inflationary pressure on the dollar how come the price of oil went down in US dollar costs?

3. ### Challenger78Valued Senior Member

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Someone probably increased supply to the US.

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Two things - the dollar has begun to rise again and a worldwide decrease in demand for oil.

Much to early to say how long either will last but, at least for the moment, both are heading the right way.

7. ### DubStyleI may be wrong, but I doubt itRegistered Senior Member

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The US really isnt causing all that much inflationary pressure. Commodities like food and oil are what is driving this spat of inflation right now. US growth is way too slow at the moment to overheat and cause any type of real wage/price inflation that I think youre talking about.

8. ### nirakar( i ^ i )Registered Senior Member

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Demand is down some.
The Dollar has been rising lately. Perhaps there is an intervention by ^^^ to raise the dollar. Perhaps currency traders just thought the dollar fell to much.

Now days when you see some types of foreign investment into the USA you have to wonder whether it is a serious attempt to achieve return on investment or whether it is to manipulate currencies.

With no end in sight for US trade deficits you have to assume the recent rise in the dollar is just a temporary pause in a long downward slide.

Oil will tend to rise when the dollar falls and fall when the dollar rises as long as oil is priced in dollars. But, that big rise in the price of oil was primarily not about the fall of the dollar. I have yet to see a good explanation for how speculation in oil futures trumps current supply and demand in setting current spot market oil prices. Although I am not seeing a decent explanation for how futures market bubbles and busts set spot market prices it does seem that the bubbles and busts in the futures market might dominate current prices.

Changing levels of storage is not much of a factor in the interplay between the oil futures market and the oil spot market. Prices go up when storage gets low but they don't add to storage because prices are low or take stock out of storage because prices got high.

Oil like gold is an inflation hedge so the rise in oil could have been a prediction of future inflation. The fall in oil could be a reversal of the prediction of future inflation.

In the long run oil will continue to rise in price until it starts being replaced by alternative energy sources. Population growth alone will increase demand. As the third world modernizes demand increases. A global recession would decrease demand but recessions don't last many years.

Bottom line: Nobody knows what oil should cost therefore the price of oil will continue having numerous cycles of going up in price too much and then coming down in price too much.

9. ### DubStyleI may be wrong, but I doubt itRegistered Senior Member

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Look at US treasuries and TIPS. There still doesnt seem to be much fear of expected inflation using them as an indicator.

10. ### OilIsMasteryBannedBanned

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The price dropped because the hydrocarbon supply is infinite. Everyone with a scientific brain cell in their head realizes peak oil is a hoax and biogenic fossil origin is laughable. Oil is now in bear market territory. National Oilwell Varco (NOV) and Transocean (RIG) are the way to profit from deep abiotic reality.

11. ### James RJust this guy, you know?Staff Member

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Anything with an infinite supply costs nothing. And we all know that oil costs nothing.

12. ### OilIsMasteryBannedBanned

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So you believe human stupidity has no cost? I beg to differ...

13. ### desiValued Senior Member

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I've seen one old article which agrees with this, from an oddball source. Do you have a good source to confirm this infinite supply of oil/hydrocarbon?

14. ### desiValued Senior Member

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I'm looking at inflationary pressure from the government's reckless spending of money they aren't taking in from tax revenues. They seem to be printing money with value backed by nothing at all.

15. ### James RJust this guy, you know?Staff Member

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What have you found, in your own experience?

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17. ### SyzygysAs a mother, I am telling youValued Senior Member

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Because there were more sellers than buyers.

OK, the real reason was because I accidentally pushed the sell button...

18. ### OilIsMasteryBannedBanned

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Yes.

See here, here, here, and here.

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20. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

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There has not been any significant increase in production, so that is not the reason.

The three largest economies in EU have recently had negative growth rates. Thus the expectation is that the banks may easy money there to stimulate the economies (lower interest rates) this makes the Euro less attractive than the Dollar. The dollar buying more than it did a few months ago, means it takes less dollars to import the same quanity of commodites* like copper, gold, oil, and manufactured goods like shoes, blue geans, etc.

Answer is really is quite simple. See documentation in Bloomber's graph showing prices of many commodities (all with very sharp fall from their peaks of less than two months ago) at:

http://www.bloomberg.com/markets/commodities/cfutures.html

To mention just one: Gold was above $1000 an oz and even with a more than$5 recovery yesterday, it is still below \$800/oz now.

OIlisMastery is again posting his nonsense. The fall in price of oil has essentially nothing to due with the quantity available. Even only slightly the effect of the Chineses closing factories and prohibiting car use etc for the Olympics. It is mainly caused by the rapid shift in the Euro / Dollar ratio and that was caused by the perception that FED is now more serious about control of inflation and the European banks may be less so now.

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*Sugar is an exception - its price is rising. This is because the supply is rapidly decreasing. Brazil is now converting 61% of cane juice into alcohol, not sugar, and India is reducing the acreage planted for sugar production. (Planting more food valuable crops.) US stock piles are very low by historic standards (less than 20 days of consumption in storage!). See documentation at:

" ... If signals emanating from the world market are any indication, the situation might worsen in the coming months. The latest production data from Brazil reveals a 13.2 per cent dip in sugar output to 6.47 million tonnes (mt) during April-July, this year, as against last year’s corresponding level of 7.45 mt. The same period has seen a 7.2 per cent increase in alcohol production from 5.79 to 6.21 million cubic meters.

The above trend is largely a reflection of high crude prices — leading to a record 61 per cent of Brazil’s crushed cane being diverted to ethanol production so far this season, ..."

"... The US Department of Agriculture’s (USDA) latest projections are that the end-September 2009 stocks in the US, at 6,07,000 tonnes, would be the lowest in the last 10 years and below the 10-year-average of 1.6 mt. The expected stocks-to-use ratio of 5.5 per cent would represent less than three weeks of consumption. ..."

Last edited by a moderator: Aug 18, 2008

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Speculators

22. ### Billy TUse Sugar Cane Alcohol car FuelValued Senior Member

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When looking for someone to blame for things people do not like the "speculators" come in handy, but they actually are not to blame. In fact, their major effect is to moderate price shocks by anticipating what is likely to happen, and making some of the shock occur now instead of later, more rapidly with much greater damage to the economy.

I.e. "speculators" are not the cause, the cause is something they foresee and act upon now.

For ever seller there is a buyer, but when the "typical speculator" thinks that a big price rise is coming, he buys now and this tends to make the price changes more smooth, more gradual. - Less economic shock.

To give an example:

Without speculators, who for example will buy now the corn to be harvested in 2009, the farmers would have more risk and plant less and the price would be higher in 2009.

The farmer can transfer much of this risk to the speculator and thus plant more in confidence that even it other farmers are doing the same, he will not go broke in a glut of corn. - It is the typical speculator who will take the loss if he was wrong in his expectations that there would be a shortage. If there is a shortage, as the typical speculator expected, the price of corn in 2009 will be less than it would be without speculators for two basic reasons:

One I have already mentioned is the farmers do plant more.

The otrher is that with the speculators causing an increase in the price of corn in 2008, the user of corn will be making adjustments in 2008, not waiting until hit by a great shock in 2009. I.e. They try to see if they can subsitute something else for part of their normal corn needs.

SUMMARY: The speculators reduce economic shocks.

Last edited by a moderator: Aug 18, 2008
23. ### S.A.M.uniquely dreadfulValued Senior Member

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Thats not how it works in India. We have people buying short, artificially manipulating the markets to control prices and making money from it.