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I Hate Wall Street Traders

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So I've ranted and raved before about the idiocy of Wall Street's activities creating false prices for oil. The specific take away is with regards to market making where "the purchasing whims of a single entity can have global impact on a product’s price – even when its not 'real' demand" and that single entity's activity is exacerbated by market bandwagoning. Nearly three years ago today, strategists described the situation of 2008's oil run up quite succinctly, "The guys who screwed up the mortgage markets are bringing their awesome skill sets to bear on physical commodity markets."

So let's look at some really simple data. How tied to the price of oil is a gallon of gasoline? First, just because a barrel contains 42 gallons of oil doesn't mean you get 42 gallons of gasoline. That barrel gets divvied up into different products through the refining process. But generally speaking, the amount of gasoline that comes from a barrel comes at a somewhat standard ratio. I threw this little chart together graphing oil and gasoline prices for the past 25 years from data available from the US Energy Information Association. While the ratio between them actually spans 21% and 50%, there's an approximate 35% ratio that fits the data with the outliers removed and the graph supports that trend fairly well. That said, we can logically remove the fuel distribution chain as the culprit of today's gas hike.

So the next fundamental driver of price in a free market economy is - drumroll - supply and demand. Again, using data from the EIA, I quickly graphed world oil demand from 1986 through 2005 with their extrapolated projections of demand through 2008. The line shows a fairly steady rising trend but unfortunately terminates right where things get interesting. I was able to find actual 2009 oil consumption data which shows worldwide consumption as 82.7 million barrels per day. That's interesting because it does show a depressed demand for oil following the 2008 price spike. But otherwise, despite a dampening, shows steady, predictable growth.

I then pulled the following images from the IEA's Oil Market Report which show the past two years of supply and demand. There is an odd point in the data – perhaps they graphed it wrong or perhaps they're projecting but the 2011 demand graphics include quarters that haven't occurred yet. So ignoring the anomalous projections of 90 million barrels for Q3 and Q4, the graphics show that present supply meets present demand. Unless I missed something critical and huge, the only oil supply worries that have made news recently was the loss of Libyan oil to Europe due to the uprisings. The price of gas was relatively stable at the current production levels prior to the uprisings, so the factor regarding supply costs should be dismissable. As the IEA's own data shows, OPEC (of which Libya is a member) provides only 30% of the total supply and the Libyan conflict reduced that supply by only about 1 million barrels. This leads to only one conclusion, the near doubling in gas prices over the span of 60 days has nothing to do with real supply and demand and everything to do with trader activity and forecasting.

The IEA's graphics for supply and demand show no trend deltas that would justify a doubling of price.
IEA seems to have extrapolated demand for quarters that have not occurred yet. For the sake of present analysis, those extrapolated figures are meaningless.
Note that there are no real apparent impacts to world supply despite trader behavior implying there is a shortage somewhere.

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