Wednesday, October 10, 2007

Where Has All The Oil Gone?

Ann Davis, writing for the Wall Street Journal's Weekend Edition did a bang-up job explaining an arcane subject in understandable language:

...The reasons Cushing's crude has been disappearing are surprisingly complex, and shed light on the growing involvement of speculators in the global oil market. Tanks are emptying partly because producers have been straining to keep up with demand. But investment banks and other financial firms also played a part by abruptly shifting their oil-trading strategies this summer. Even the credit crunch sparked by the subprime mortgage fiasco had an effect.

Until mid-July, unprecedented conditions in the oil market had given oil companies and speculators alike a financial incentive to sock away oil in storage tanks for sale later. Then, almost overnight, it became more lucrative to sell oil immediately, and in short order, the cushion of stored oil shrank.

The financial players who have piled en masse into commodities trading in recent years have made oil markets more unpredictable. Some are simply betting that oil prices will rise over the long term. Others are pouncing on pricing anomalies as short-term trading opportunities. Many of them move in herds.

"Factors other than supply and demand are now impacting the price," contends oil-and-gas trader Stephen Schork, who publishes the Schork Report on energy markets. "We now have to factor in how the speculators are going to affect the market, because they have different priorities in managing their portfolios."...

Read it all.

Hat tip to MarketBeat's blogroll of Econbrowser's link to Economics and... for their link to the Online WSJ (link above).

Just so I don't have to disturb a carbon sequestration project in the corner of the office.

Thanks folks.