Please explain to me how you are getting paid 145 dollars today. The spot price is 100 dollars in your hypothetical. That is todays price no one will pay you 145 for oil delivered tofday.
You plan, from your hypothectical to deliver oil in 2016.
The only way to do that is to sell a future. From what I understand of your hypothetical you were planning to sell futures today for a settle price of 145. I am just explaining what a futures contract with 145 settle price and a settle date of 2016 means.
145 per bbl will not get paid to you today.
No shit, Sherlock.
Well, you at least understand that much.
Well, duh.
You explained that. And once you made it clear that (using your nomenclature) the settle price wasn’t what I’d get paid now, but what I would get paid at the settle date, then I made it clear that the settle price in my example was $200.
Over and over and over again.
You keep on insisting otherwise. You keep on insisting that $145 is the settle price in my example.
So we really don’t have anything to talk about, do we?
Be blonde here, or be blonde somewhere else. I don’t care - I’ve had it with you.
I think what he’s saying is that there’s no way you’ll be able to get a margin price of $145 now for your futures contract when oil is selling now for $100.
Actually at this point I don’t think anyone’s understanding anyone else.
If I’ve got it right, Firefly Oil is generating revenue by selling oil futures at $200 for 2016, and then essentially selling those $200 2016 dollars for $145 right now.
It seems a horrible business model to me. There’s just way too many things that can go wrong by selling future obligations 8 years in advance. How on earth, for example, do you figure out how many 2017 futures to sell next year. Since you won’t actually start pumping till 2016, you can’t adjust your projected production based on actual results from actual wells. Couple wells turn out to have way lower reserves than expected and suddenly you’re on the hook for up to 8 years of production where you’ll have to buy on the spot market to fill your futures contracts.
Speaking as an outsider to this conversation who has been following it with mild interest, you’ve massively muddied the waters with the shift in values. You’re way out of line with the condescension and accusations of trollery, and it might help if you just restated the hypothetical from scratch; at this point it’s really not clear what you mean at all, largely because of this sentence IMO:
Under what circumstances are you gettin $145 now? I thought in your hypothetical the spot price now was $100.
(Ah, I think Captain Amazing has, appropriately, put his finger on it.)
Well, he’s saying that too, now that you mention it. But the weird thing is, that was the whole point of my example: that the present value (with whatever risk premiums, margin deposits, what have you, built in) of a futures contract couldn’t be much greater than today’s price.
I was trying to demonstrate that by assuming the opposite, and showing how that led to an impossible conclusion.
The reason why I was trying to demonstrate that was because Gorsnak questioned me on that point earlier. (See posts 59, 63, 64.)
My problem with the blond dude was that he was adamant about refusing my assumptions. He said I wasn’t getting $145 now, I was getting $145 in 2016. And he was quite insistent about that. I was perfectly willing to accept his correction that I didn’t get paid until the date the oil would be delivered, but I adjusted the example accordingly, and he repeatedly refused to accept the adjustment. I had to be getting $145 in 2016, come hell or high water.
Yeah, I think he was trolling. Can you think of any other reason why that $145 in 2016 was immutable?
But if we’re all in agreement that there’s not going to be much daylight between what I can get for a barrel of oil here and now, and what I can get today for a future delivery of the same barrel, then we can put all this behind us. That was what I was trying to demonstrate; if there’s no argument, we’re done.
FWIW the I read your repeated comments that you would have 145 in your pocket now and you would be getting 145 now as meaning you would actually have that much cash now rather than it represented the PV of the 200 in the future. The only way I could see you would think you would have 145 is through the closure of a 145 2016 contract. No trolling just a terrible time trying to work out why you thought you had 145 bucks in your pocket now hence my repeats on what a 2016 145 contract was. I was reading your 200 as teh future spot, 145 as teh contarct and 100 as todays spot.
If we can drop this whole interlude and head back to the question
“what would happen to the market for oil to be delivered NOW if the expected value of oil in 2016 is substantially higher?”
There is a situation know as cantango where the future price is higher than the current price. If we take a case where the current spot price and everyones best geuss at a future price is the same value, the fair future price is the current price plusstorage plus of minus the interest rates. If you paid more as a buyer you would be beter off buying on the spot today and storing it. The situation is much the same for the producer selling. Without variations in future prices cantango would be a normal market condition
It is a common thing for traders with stock to hold it back in an upward moving market as they know they will get a better price tomorrow. This is not a sustainable condition, they have to sell eventually, not everyone can join in beacuse other wise storage would run out pretty quick. Plus the markets would see big stock builds and figure it is going to come to market eventually and so future prices drop. Iran has a habit of doing this on a biger scale, and the Iranian floating stock build is a regular feature on the IEA monthly oil report. How ever again they can´t do it forever, there is a limit to the availability of floating storage and the Iranian gov also needs cash flow. They could go out and try and borrow aginst the oil in storage. However the Iranian gov does not have easy access to capital and so the cost of borrowing is high. If they are hoping to swing the price of oil by withholding, they better hope for big swings to offset the interest.
Anyway the cost to withholding oil in the hope of a price rise to the trader is the cost of storage.
If a oil producers (both international operators and national oil companies) just turns off the pumps as a form of storage to cover a futures contract commitment, the futures settle price needs to cover the cost of borrowing today to support ongoing operations (companies and countries cash flow cannot just dissapear)maintenace of infrastructure, cost of restart of operations and cost of risk of not restarting etc.
Now for a very very small operator (we are talking guys with a well or two who have already paid back development costs and really do not have much staff or infrastructure, basically real true mom and pops) then yes the could sell a future, try and borrow against it and sit it out. They would be required to maintain a marhgin balance with the exchange though. These would be very small volumes taken off the market and really would not affect the spot or future price at all.
For any significant organisation or group of organisations (which I took Firefly oil to be) whos production loss would be noted, they would fall into the catagory of companies or countries that would suffer due to cash flow drying up and the future price would have to be a significant increase to offset any borrowing required.
On the issue of price connectedness between the future value and todays value, that is really explained by the links between future price and todays spot price.
In the example of todays price being 100 and the future price of 200 (with a pv of 145 to account for all that funny time value of money deal) that split in 45 dollars has to represent the cost of storage. If the cost of storage is only 35 no one will buy the futures for 200. They will simply buy the oil at 100, pay 35 bucks over the next 8 years to 2016 and sell (or use if that was their intention for buying the future) the oil then. This would have only cost them 190 bucks (if we ignore TVOM on the storage fees). Basically the gap you hope to make money on will not exist because no one will pay over the odds for what they can get by other means
The speculators are all in the middle hoping to make money on the daily changes in the 2016 futures price for new contracts issued, or hoping the spot will be higher or lower so they can clear their futures commitments with a profit.
apologies for the aggro
NBC
Apology accepted. And I apologize for my accusation of trolling.
Getting away from my example, and simply sticking with your description of how things work, that’s pretty much what I was trying to say with my hypothetical. If I didn’t say it very clearly, I apologize for that too.
Cool, have a beer on me.
Don’t mind if I do. A cool one would be just the thing on this warm afternoon.
I’d say you’re wrong. I’m reading the thread. We’re still rehashing the same old arguments that were in GD a few months ago when oil was at $140
Ok…so you’re reading a thread that you started off by branding a group whose opinion you don’t share as nutjobs; you’ve added zero to this discussion other than a bit of childish name calling. I’m sorry, but until I see you posit some worthwhile opinion, I will stand by my original statement that you are a troll.
Do you really believe that a few months (in an election year) is going to produce enough evidence to prove either side’s argument?
:rolleyes:
They have now.
http://news.yahoo.com/s/ap/20080914/ap_on_bi_ge/ike_energy
The barrel price is low ,under 100. The price jump was just advance looting. They did it a day and a half before the hurricane ,charging big prices for what was in gas station tanks across the country. This quarters profits are going up again.
So are you against Big Oil or speculators? Still not sure.
I don’t like being called a nutjob.
The OP is picking arbitrary numbers, some of which are now wrong. Maybe he should have said 400$ a barrel and 8$ a gallon.
You guys are arguing over this crap.