About Oil Prices

Gloria Smith asked:


Prices of oil have a domino effect on the prices of many major products worldwide. As oil prices go up, so does the price of food especially those that use oil in manufacturing them. Soon enough, prices of other commodities go up as well.

With high oil prices, many people regardless of their status in society are very much affected and worried. Homeowners who use fossil fuel in their heating systems are not exempted. It is because they will have to spend more this time to have their regular stock of fuel and this a major concern for them. The Federal government already foresees a 30 percent increase in the fuel expenditures of an average household that uses oil as its primary heating fuel compared to the 2007 winter season. Apart from oil, they will also have to deal with the high electricity rates which have gone up as well.

As of August 2008, the average cost of home heating oil is pegged at $3.13 per gallon. This is still considered quite steep despite the recent drop in the price of crude oil.

Home heating oil prices are affected by several factors including supply, demand, geography, weather conditions and politics. Prices have become very volatile in that they can change several times in a single day mainly because of a variety of world events. However, as weather is another major factor, it is typical for home heating oil prices of oil to increase during the winter season despite a drop in the price of crude oil.

The Department of Energy’s Energy Information Agency projects that for 2008 to 2009, the prices of residential heating oil during the regular heating season covering the months of October to March will average $4.34 per gallon. This is an increase of 31 percent from last year’s $3.31. Home heating natural gas prices are also seen to go up by 22 percent during the same heating period to an average of $15.58 per Mcf.

Because of a weak economy and high prices of crude oil and other products, a survey by the Energy Information Administration projected a decline on U.S. petroleum and other liquids consumption by about three percent. The first half of the year alone showed a drop in total consumption by an average of 930,000 barrels per day compared to the same period a year before. The decline is seen to continue for the rest of the year despite a rise in domestic and worldwide crude oil production.

Fortunately, some concerned legislators are taking steps to help provide relief to the situation. A move in the works is the expansion of the Federal Low Income Home Energy Assistance Program (LIHEAP) that is aimed at providing direct assistance to low-income families and the elderly people experiencing high home heating bills. A noteworthy action is the introduction of the “Warm in Winter and Cool in Summer Act” which would allot $2.53 billion in additional emergency LIHEAP funding for this 2008 winter.

Other lawmakers, in their own way, are offering tips to consumers that will help lower their energy bills ahead of the winter months.



Roland

bjeff72 asked:


I would appreciate some considerate answers as I’m by no means an expert on politics or economy. It just looks like since he’s been in office oil prices have consistently gone up and he does have interest in oil so it looks shady to me. If you think I’m wrong that’s ok, just please present your answer in a non insulting, non condescending fashion please.

Dan

Dennis Stutes asked:


Investors always want to know what the odds of losing their capital will be. Investors want to know when they will begin making money after sending funds to participate in any investment offering. This is the development time risk. Three, Investors want to know how good the profit structure is, or more specifically, how much money will they make during the life of the investment? I would add a fourth and fifth concern which would be what tax write-offs are there, and finally, what liquidity is there going to be in the investment, or in other words…what’s the exit strategy, if any?

Risk is of primary concern to anyone who is expecting to make money, and the deciding of who with, and where to invest hard earned money are the key questions. Upside, downside, and everything else in between are all factors when an intelligent investor analyses any investment, and determines how much, or little to choose to invest. There are many types of risk…I would like to list some of them based on my own experience, considerable research done during the past 24 years, and based on some failures I’ve also had over the years.

There is a people risk…finding the right people is absolutely essential, in fact I believe this to be the single most important requirement before doing any business with anyone…bad people screw-up great deals. Finding trained, experienced, and highly motivated professionals who don’t quit until the job is done right, and in a reasonable period of time can be difficult. People who can work together while finding the crews, and equipment you need to develop the leases, and fields you have so carefully selected, is not easy. It can make or break-you. Relationships based on years of working together is your best insurance of getting the necessary, and correctly accomplished development work you need done in timely fashion.

Track records are important, but hard to quantify in oil & gas, simply because like the movies, you are only as good as your last picture show. Well meaning, and extremely competent professional people, working with great teams, and putting a great deal together can lose, or not succeed with every endeavor, irregardless of their desire to do well, or regardless of their wonderful technical abilities and experience. It’s always really important to keep this in mind…however, working with incompetent people, or people who don’t know how to get the job done right, or regularly finish what they start isn’t an acceptable outcome. You need to avoid these often fairly confident sounding people when you first begin talking with them, and there are some excellant clues to look for when trying to decide who to avoid.

The deal is of paramount importance of course, but how it’s structured to provide you with upside, while minimizing downside, providing diversificiation, and being achievable at the same time, and in a reasonable period of time is still a significant challenge…the premise of any oil & gas deal has to be supportable with good history, logic, geology, engineering, and just plain has to make good sense, for both area and the time.

Some oil & gas drilling, and developmental areas in the US are intrinsically very risky for example…the Gulf Coast is one such area, and it’s where the faint of heart should not venture…costs are extremely high, as are the technical risks of failure, of which there are many. The statistical track record for most participants in the Gulf Coast area is less than a 50% hit rate of completing commercial wells, even when finding recoverable reserves. Competition in the Gulf Coast areas is brutal, and the big boys control the lay of the land…you’ve all heard of the expression, ‘my way, or the hi-way’?

Previously drilled and developed older areas which have historically produced many millions of barrels of oil in the past, and are still doing so right now. These areas are being re-visited by large independents, and the majors, because they often have much less risk than new exploratory offshore areas. Wells can be placed into production for far less money, and much quicker than the big new fields being discovered elsewhere. Many of these older fields may not have such exciting upside, however higher prices in oil and gas now support the return to some of these areas even though they have been depleted of their primary recoverable reserves of oil & gas. Secondary drilling and recovery methods can rival, and exceed the outcomes relative to both rates of return, and upside you might get in the Gulf Coast states, or with offshore drilling programs. Actually, since the late 70’s most of the middle east oil fields are in secondary recovery, and are being water flooded, which is the principal means of recovering the last remaining reserves in place in an oil field.

Finally, there is the price risk, or volatility risk…oil & gas prices are high, particularly oil prices, which are going-up in the foreseeable future, or within the time lines we are investing, and developing new oil & gas projects being planned during the next ten years…there will be alternate energy sources, and conservation efforts, but demand will be greater than supply capabilities based on my research.



Jessica

Ryan Dube asked:


To understand the how crude oil prices are set, it’s important to examine the level of crude oil prices from around the world.

A Snapshot of Crude Oil Prices from Around the World

According to the EIA (Energy Information Administration), since 1978, crude oil prices remained fairly constant between $10 to $25 per barrel with the exception of a few years where there was crisis in the Middle East. This steady trend changed dramatically immediately following the invasion of Iraq in 2003. In January 2003 the crude oil price per barrel was $29.55. Five years later, in January 2008, the crude oil price per barrel had risen to $92.15 per barrel. The price continues to rise exponentially, with no end in sight.

A Brief History of Crude Oil Prices

Worldwide crude oil prices have always fluctuated over the years. The price depends on several factors, but most importantly demand and supply. During the decades between the end of WWII and 2007, oil prices never exceeded $24 per barrel except during times of conflict in the Middle East. Looking at any chart that outlines crude oil prices from the late 1800’s through 1969, the price remained fairly constant below $20 per barrel (adjusted for inflation).

What Created the Upswing in Oil Prices?

The moment in history that preceded the sudden rise of oil prices based on middle-east crisis was in 1960 when OPEC was formed. The founding countries of OPEC include Iran, Kuwait, Iraq, Saudi Arabia, and Venezuela. By 1971, Qatar, Indonesia, Libya, Algeria, Nigeria, and the United Arab Emirates had also joined OPEC.

Before this occurred, the Texas Railroad Commission typically put an upper limit on prices because Texas producers were limited in oil production. March 1971 marked the first point in history when Texas producers were no longer limited in production, however U.S. purchasing power of a barrel of oil declined by 40%. Since OPEC still had the capacity to meet demand, it also took over the power to influence oil prices through supply.

Examples of OPEC’s Power

OPEC received its first taste of power in 1972 during the Yom Kippur War when Syria and Egypt attacked Israel. The Arab states imposed an embargo on western nations that supported Israel, resulting in a net loss of 4 million barrels per day of oil production through 1974. Suddently, oil prices skyrocketed by 400 percent in six months. In 1979, the Iran/Iraq crisis caused a reduction of 2.5 million barrels per day in oil production, resulting in another price spike in oil prices.

How OPEC’s Power Was Overruled

Events that countered the price increases in the 1970s was consumer reaction to high oil prices. Consumers began reacting by making their lifestyles more energy efficient. Consumers insulated their homes better, installed more energy efficient appliances and energy conservation efforts at the industry level. By the time OPEC increased supply, demand had dropped and would not recover for many years. So through the 70s and 80s, OPEC recognized their power, but also the limitations of that power.

History Repeats Itself

Contrary to popular belief, the recent spike in oil prices didn’t begin in 2001. It actually began on March 19, 2003, when the Iraq War started. The low oil production in Iraq and Venezuela, combined with increased demand from the rest of the world, like China, resulted in a lower excess capacity of oil production. Because demand exceeded supply to the degree that the excess capacity dropped to less than a million barrels a day, the risk of even a temporary interruption of OPEC oil supply is what largely resulted in the dramatic price increases since 2003.

How to Break the Cycle

As the country enters a new era that is, for the most part, almost identical to what the country went through in the 1970s, the solution now is the same as the solution was then. Through making different lifestyle choices that drastically reduce our demand of foreign oil, the United States will be able to remove the political and financial grip that OPEC has over this country. By making sure that our elected politicians pursue new alternative energies and also stricter guidelines enforcing energy efficiency throughout industry, the United States will successfully move beyond the era of foreign oil dependence, and into a new era of energy independence.

Visit CostOfOil.net for all kinds of information and resources about the current price of crude oil.



Julio

Kendell asked:


Now that oil prices are rising, what are some of the short and long term effects the world will have to face?

Lois

Andy Goldman asked:


Investors can now track the price of oil futures without buying oil futures through a new Exchange Traded Fund. (UCR), operated by Claymore Securities. The thing that makes this unique is that the ETF does not invest in the futures either. “We’re not buying oil, but because we issue shares in pairs we can generate returns by pledging assets between the matching funds,” said Greg Drake, managing director at Claymore Securities, in an interview.

In other words, promising assets between the pair alters the ETFs’ share prices to synthetically reflect oil’s movement. This makes it a lot easier for investors who would normally not go anywhere the futures market to get exposure to oil prices in their portfolio.

Think oil prices are going to drop? Well Claymore has you covered there too. Claymore also operates a fund (DCR) that is designed to provide positive returns to investors when the price of oil is falling. Using these two funds, investors have a number of ways to invest in oil prices and devise their own hedging strategies.

The fund trades in MacroShares. The MacroShares have a maturity of 20 years from the original offering date, but as with all ETFs investors can sell their shares throughout the trading day. If the shares move 85% away from their initial prices in either direction for three straight trading days, a termination is triggered. The shares then would distribute all assets back to shareholders at the end of the quarter, and Claymore would issue a new pair.

Therefore, investors in the Claymore MacroShares could lose most or all of their initial investment if oil prices move dramatically against them. How likely is this? If the initial shares were offered at $60 a barrel, that means oil prices over a period of 3 days would have to move about $51 up or down away the $60 buying price. Yes it is possible, but very unlikely.

How Are these Shares Different From Their Competitors?

The Claymore MacroShares are structured very differently from other oil-linked ETFs on the market such as U.S. Oil Trust (USO) which invests in oil futures and “rolls” the contracts to maintain exposure.

Barclays Global Investors manages an “exchange-traded note” called iPath Goldman Sachs Crude Oil Total Return ETN (OIL).

PowerShares Dynamic Oil & Gas Services Portfolio (PXJ) invests in shares of publicly traded energy companies.

Commodity ETFs that use futures, such as U.S. Oil Trust, can produce either positive or negative “roll return” based on the relationship between spot prices and longer-dated futures contracts. Any capital gains are passed to investors and are taxed as 60% long-term gains and 40% short-term gains.

Sometimes, futures prices are lower than the spot price for a commodity, a condition known as “backwardation.” In the opposite situation, called “contango,” investors experience a negative roll yield because futures prices are higher than spot prices.

Claymore said its MacroShares won’t experience either situation because they synthetically provide exposure to oil prices by pledging assets, and don’t use futures.

So investors can invest in Claymore MacroShares by themselves or use Claymore with one of the other funds to create a hedge.

The options for investors are becoming greater and greater but the complexities are also increasing. Investors should become familiar with the vehicle they are investing in before money is committed. As ETFs move more and more into the commodity based areas, investors will have investment options never open to the middle of the road investor before.



Audrey

daniel asked:


With the prices of oil increasing, do these price increases translate into higher pricing for oil stocks?

Geraldine

Joe asked:


By Martin Hutchinson

Contributing Editor

Money Morning



Between September 2007 and June 2008, oil prices doubled, gold rose 30% and commodities, in general, advanced by a similar percentage.

So why, six months later, when prices have fallen back below last year’s levels, does everybody think they won’t rise again? The difficulties of extraction haven’t gone away, nor have the prospects of increasing consumption in the faster-growing emerging markets such as China. Yes, the prices of commodities are severely affected by marginal moves in supply and demand, but this is ridiculous!

Rest assured, commodities prices will rebound in the New Year. The reasons will soon become quite clear.

The decline in commodities prices since the summer is broad-based. The Reuters Continuous Commodities Index traded recently at 341, down 25% from a year earlier and off about 45% from its June high. At $48 a barrel, oil is trading at less than one-third of its June high. And gold, which appreciated less than other commodities in the spring, is still down 18% from the $1,000-per-ounce level it reached earlier this year.

Conventional wisdom blames the decline in commodity prices squarely on the global recession. Since the rise in demand from emerging markets – particularly the huge consumption bases of China and India – had caused the previous run-up, it seems natural that the absence of that demand growth would cause prices to decline. After all, that happened in 1982, when a deep recession in the United States spread to a number of other countries. Oil prices plunged from $40 a barrel to a mere $10, breaking the back of the Organization of the Petroleum Exporting Countries (OPEC) in the process.

This time around, however, the math doesn’t seem to work. For one thing, the world as a whole is by no means locked into recession. We in the rich countries think of our economies as spiraling into a deep decline, but the reality is that we may only be witnessing a secular shift caused by the narrowing of income differentials between rich and poor countries as globalization proceeds.

In countries such as China, India and Brazil – three of the four so-called “BRIC” economies – growth has slowed and many are suffering imbalances in their financial structures, but there is little sign of actual decline in any of them. Indeed, if China’s recently announced $590 billion infrastructure investment serves to redirect growth toward domestic consumers, it is possible that the demand for oil and other commodities there may show very little dip at all; it takes a great deal of iron ore and other commodities to produce $100 billion worth of railroads, for example, one of China’s stated objectives.

On the supply side, OPEC was full of spare capacity in the 1980s. South Africa and the Soviet Union were still expanding gold production, and the explorations of the 1970s had produced surpluses of many other commodities. But in the past two and a half decades, things have changed.

Oil, for example, remains in short supply. Both deep offshore fields – like those discovered by Petroleo Brasileiro SA, or Petrobras (ADR: PBR), in the Tupi Complex – and the tar sands (like the ones in Canada and Venezuela), are economically unfeasible with oil trading at such a low price. And, if prices remain low, the expansion and exploration of new sources of production will be curtailed even further.

More importantly, though, supply and demand is only one of the reasons commodity prices rise and fall. What really spurred the big price rise in commodities that took place earlier this year was the explosion in the money supply throughout the world.

Money supply, unlike demand, is something that hasn’t evaporated with the economic downturn. In fact, it has actually ramped up. Even though money markets have become illiquid, central banks throughout the world are forcing down interest rates and pumping out liquidity by every means they can think of [Indeed, the policymaking arm of the U.S. Federal Reserve meets today (Tuesday), and is expected to cut rates yet again. For a related story, click here].

Meanwhile, governments everywhere (except Germany) are implementing massive “stimulus packages” that will destabilize budgets and insert huge additional demand into the global economy. Since the governments will have to borrow the money to finance those stimulus packages – and the budget deficits that are inevitable in an economic downturn – central banks will be compelled to pump out even more money to accommodate all the increased debt; otherwise, interest rates would go through the roof and finance for the private sector would become unobtainable, hardly the object of this whole costly exercise.

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The future is thus one of rapidly increasing inflation, combined with a healthy recovery in global demand, at least in the emerging markets, as Europe and the United States may suffer deep recessions this time around.

To take advantage of this likely trend, I would recommend a broad portfolio of shares whose prices are closely linked to the prices of major commodities. Among those you might consider:



Vale (ADR: RIO): As a gigantic Brazilian iron ore producer, Vale will benefit enormously from China’s new infrastructure program (Think of all those steel rails!). The stock is currently trading at just over $12 a share with a Price/Earnings ratio (P/E) of about 7.0 and a yield of slightly more than 1.0%.





Rio Tinto PLC (ADR: RTP): Another huge mining conglomerate, the long-and-bloody attempted takeover of Rio Tinto by BHP-Billiton Ltd. (ADR: BHP) recently fell apart. At $93, Rio Tinto shares have a yield of 5.8% and a prospective P/E of about 3.0. The company is overleveraged, so somewhat dangerous, but you’d be getting paid for the risk.





Suncor Energy Inc. (SU): The largest pure player in the Canada’s Athabasca tar sands, Suncor’s marginal cost of production from operating facilities is about $30 per barrel and the cost of opening new facilities is about $60 per barrel. It’s currently trading with a P/E of 8.0 but has a yield of less than 1.0%, as it needs all its cash.





SPDR Gold Trust (GLD)exchange-traded fund (ETF): The largest ETF that invests in gold, GLD has more than 750 tons of the “yellow metal” held in trust.





Yanzhou Coal Mining Co. (ADR: YZC): China’s largest coal miner, Yanzhou has a P/E of 4.0, yields 3.5% and enjoys low costs – not to mention a super-close proximity to the gigantic market that is China.



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Juan