Monday, June 23, 2008

Gas could fall to $2 if Congress acts, analysts say

Holy downtick, Batman!
From 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....

...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...MORE

Compare to this insightful comment (he said modestly)
Responding to MarketBeat's post "On Speculation and Commodities Prices"

There is a real nomenclature problem here.
“Speculators’ is the word we used to use for the guys in the pits who took the other side of a commercial’s hedging activity.
Calling the index fund investors “speculators” is a misnomer.
In commodities speculators perform a societal good. Investors, not so much.
Here’s a simple thought problem:
What would happen to prices if $200 Billion of the estimated $260 Billion that has gone into commodities indexes was taken out?
If your answer is “prices would go down” then you’ve also got the answer to what the INflow of “investment” dollars has done.
Re: “…commodity derivatives contracts outstanding could well grow at a rate faster than other derivatives markets…”
Commodities are also underrepresented in the structured product universe.
Collateralized Commodity Backed Obligations anyone?
Commodity SIV’s?
Just be sure you’ve got the helicopter gassed up because when the townsfolk come, it won’t be with pitchforks and torches.
And pinstripes make lousy protective coloration. As they used to say in the Brit. nature shows:
“Sadly now, there can be but one outcome…”

Comment by Climateer - June 17, 2008 at 4:47 pm
*Oil Markets, the U.S. Senate and Michael Masters
As some of you suspected, Michael Masters, the hedge fund manager who testified before the Senate a couple weeks ago, was partially talking his book.
Here are the names that would be positively affected by lower oil prices:

AMR- American Airlines
DAL- Delta Airlines
LCC- US Airways
GM- General Motors