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Why gas prices dropped
Trust us. It wasn't OPEC or Republicans trying to influence midterm elections.
By Nelson D. Schwartz, Fortune senior writer October 16 2006: 11:35 AM EDT
(Fortune Magazine) -- If the recent plunge in gas prices is the result of a
conspiracy by President George W. Bush to help the Republicans retain
control of Congress, as 42 percent of Americans believe, according to one
Gallup poll, a lot of Wall Streeters wish they'd been in on the plot.
The end of oil's stunning ride
So what really drove prices down - if not an Oliver Stone-worthy scenario
involving the Commander-in-Chief, the House of Saud and Secretary of the
Treasury Hank Paulson cajoling his cronies at Goldman Sachs to sink the
crude market?
Hedge funds get ahead of themselves
By late summer, hedge funds and other investors had poured billions into
long positions in oil, gasoline, natural gas and the rest of what traders
call the "energy complex," all betting on a replay of the severe 2005
hurricane season that sent prices soaring in the wake of Katrina and Rita.
But one day after oil reached a monthly high of $76.98 a barrel on Aug. 7,
government meteorologists downgraded their hurricane forecast and cautioned
that a repeat of 2005 was "unlikely."
That announcement, combined with the end of the summer driving season and a
recalibration of the Goldman Sachs (Charts) commodity index that reduced the
weighting of gasoline, prompted speculators to head for the exits even
faster than they'd piled in.
The switch in Goldman's basket of commodities had been previously announced
by the firm, but that didn't stop the conspiracy theorists. "Hmm, what a
coincidence, luring Goldman's top dog to take a HUGE pay cut by becoming
Treasury's top dog, and then Goldman Sachs makes this unexpected decision,
serving to dramatically drive down gas prices," said the Grey Matter, a
liberal blog. But the grassy-knoll crowd didn't bother to crunch the
numbers.
According to Joel Fingerman of Chicago-based OilAnalytics.net, between the
peak of $77 a barrel in August and the October low of just under $58,
traders dumped nearly 40 million barrels (a 20 percent drop) from their long
positions. The volatile gasoline market showed an even sharper decline -
with traders cutting long positions from 32 million barrels in midsummer to
just 1.7 million in October.
"Whatever you want to call it - speculators, fast money, hot money - a big
part of the drop in crude that we've seen this year is because of selling by
hedge funds," says Merrill Lynch technical analyst Mary Ann Bartels.
Betting billions on liquefied natural gas
That avalanche of cash also explains what's got the paranoid types talking -
not merely the timing of the plunge in prices but its rapid speed.
"Speculators create more velocity around existing trends," says Bartels.
"Things are happening a lot more quickly in these markets than they used
to."
The losers
Some traders were lucky and got out in time; most weren't. Implosions like
the collapse of the $9.2 billion Amaranth fund seem spectacular, but the
fund was merely caught in a bigger and badder bet than others hoping for
another Katrina. Amaranth trader Brian Hunter bet the farm that hurricanes
and a cold winter would push up natural gas prices, but, says Bartels, "a
lot of people were caught by surprise."
The average energy hedge fund dropped 4 percent last month, according to
Joel Schwab, a managing director of Hedgefund.net, which tracks fund
performance. "They were having a great year, then things fell apart in
September when they were caught long," says Schwab.
Even broader index-type funds that invest in a wide range of commodities and
are open to individual investors are down. Manager John Brynjolfsson's Pimco
Commodity Real Return fund is now off 5.6 percent for the year, after being
up 1.4 percent before the summer rout.
The winners
One trader who's been luckier is Julian Barrowcliffe, manager of the $500
million Anglian Commodities fund. He has managed to eke out an 8 percent
gain for the year by avoiding bets on which way crude would go, instead
playing off the spreads between different products, betting on how, say,
heating oil would move if gasoline prices went down.
"Anytime you have a big reversal, the guys who follow the trends get killed
trying to get out quickly," says Barrowcliffe. As for those conspiracy
theories, Barrowcliffe insists he wasn't tipped off. "It's ludicrous," he
says. "Maybe 42 percent of Americans think Elvis is alive too."
Ironically, the current price for crude - $59 a barrel - is roughly where
oil insiders have been predicting it would be if it weren't for all that hot
money flowing into commodities. Last spring, energy consultant and Deloitte
advisor Joe Stanislaw told Fortune that fundamental supply and demand
factors suggested a price of about $50 a barrel, with geopolitical factors
adding $10 and speculators putting another $10 on top of that.
Unfortunately for drivers, Stanislaw doesn't expect the premium caused by
worries about tensions in key oil-producing countries like Iran, Iraq,
Venezuela and Nigeria to fade anywhere near as quickly as all that hot money
did. And there's no reason that money won't move back into energy if
sentiment turns and there's a new trend to play.
Right now, the latest bet by traders is for a normal winter - if there's a
sudden cold snap before Thanksgiving, expect a bump in crude. So enjoy the
low gas prices while they last. You can be sure the White House will, even
if it didn't orchestrate them.
So what's your IQ, dear?
... by calling everyone who is a conservative stupid.
Thanks Kathianne.Sorry, but I could not find the link. ed. I found it
That's true, but more often than not these are capable of being backed up.:chains: Which is why you and I are on and in the Right.
Was just informed by one of my co-workers that Bush has brought gas prices down just in time for the elections.
Anyone believe this?
Anyone know how he controls the world's oil price in SA, Russia, Venezula, Iran?
If you're not prepared to back it up then it should not be said.
It's not me thowing this stuff. I try to find back up for what I post. You or someone may not like my 'back up' but that's your or their problem.
The things that piss me off are calling someone to the mat, requiring them to back up a claim, and have them dodge and deflect and ignore. The other is once you nail them on the issue, for them to bring it up in another thread like they've never been called.
Hey, I hear ya, but I ignore those. What gets me 'nuts' is when the right thinks they are being clever and not so by 1/2, posting 'demo' rantings, without perspective.
Hello?
Here's my problem, I 'expect' stupid from the left, really. When they are cogent, I'm taken by surprise. What pisses me off? When I read 3 cogent responses from the left and 4 idiotic, fly by the seat of my pants/copy and paste leftist from mars/from the right. :coffee3:It depends on how far right you are. I consider myself somewhere right of Limbaugh, left of Savage.
The things that piss me off are calling someone to the mat, requiring them to back up a claim, and have them dodge and deflect and ignore. The other is once you nail them on the issue, for them to bring it up in another thread like they've never been called.
The things that piss me off are calling someone to the mat, requiring them to back up a claim, and have them dodge and deflect and ignore.
