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Price forecasting
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biffvernon



Joined: 24 Nov 2005
Posts: 18541
Location: Lincolnshire

PostPosted: Tue Jan 17, 2006 9:36 pm    Post subject: Price forecasting Reply with quote

Here's a quote from today's
Pacific Business News
?Oil could rise to $67 a barrel this year, if oil futures and spot market prices are predictive. But the Fed isn't sure they are. An analysis commissioned by the Federal Reserve Bank of San Francisco, whose jurisdiction includes Hawaii, concludes that if traders are on the money, the spot price will rise to $65 a barrel by March and $67 a barrel by December.?

I see NYMEX closed at $66.40 today. Ho-hum.
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Neily at the peak



Joined: 06 Dec 2005
Posts: 353
Location: Devon

PostPosted: Tue Jan 17, 2006 9:53 pm    Post subject: Reply with quote

If we peak this year, I would have thought Kunstler's prediction of $100 is nearer the mark.

I would love to see some predictions of just how high it could go within 5 years of peak when that happens! My guess is a lot higher than $100.


Neily-at-the-peak
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Ballard



Joined: 24 Nov 2005
Posts: 826
Location: Surrey

PostPosted: Tue Jan 17, 2006 10:11 pm    Post subject: Reply with quote

Quote:
I see NYMEX closed at $66.40 today. Ho-hum.


It's only Jan 17th, looks like the $70 could be breached this week...
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Optimistik



Joined: 23 Dec 2005
Posts: 3

PostPosted: Tue Jan 17, 2006 10:45 pm    Post subject: Reply with quote

So should we all be buying oil futures? I wonder when the market will catch up, if at all.
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RevdTess



Joined: 24 Nov 2005
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Location: Newquay

PostPosted: Wed Jan 18, 2006 12:52 am    Post subject: Re: Price forecasting Reply with quote

biffvernon wrote:
?Oil could rise to $67 a barrel this year, if oil futures and spot market prices are predictive.


Oil futures aren't predictive as such. While the futures prices do kinda suggest that the market expects spot prices to be $x in y months, traders dont think of it in these terms. For a trader there is really only one value for oil, and the rest of the futures prices are thought of as differentials to the One True Price. These monthly differentials are affected by criteria such as:

* The cost of holding oil in inventory for x months
* A news-driven risk premium (e.g. niggling worries about Iran raise the back of the curve whereas immediate bombs in Nigera raise the front)
* The impact of current and future freight costs (if freight is going to be expensive in June due to lack of shipping, you may need to sell your crude more cheaply in June to keep the overall price for moving it around the world stable).
* The cost of money (ie interest),
* All of which are magnified if inventory is low, or less important if inventory is high.

Therefore there are limits to how much higher the December 06 contract could be relative to February 06. If December rises too high relative to Feb, then ever more crude goes into storage, because it becomes worth waiting to sell later in the year.

In other words, you'd never see Crude oil at $66 today but showing December futures at $100, because all the crude available today would immediately go into storage for the rest of the year, or even be dumped on tankers at anchor, thus causing the prompt price and the Dec futures prices to come much closer together, usually within a few dollars.

So really if traders thought that crude would be $100 in December, the price today would have to be at least $95 due to the economics of storage.

I'm sorry if I'm making no sense. Just trying to give a view of the way traders look at crude oil forward curves. The disappointing thing is you have to have rather a lot of capital on hand to trade futures beyond 2 or 3 months because there's just no liquidity except in the OTC market between the major banks. Inevitably, the easiest place to make money is by trading the spreads between prompt months (eg Feb-06, Mar-06) and more long-dated contracts (Feb-07, Feb-08 etc) (which you and I don't have access to, unless we make a market among ourselves. I may have to set up a website to do that sometime...).

I'm hoping to do my MBA thesis on the trading of crude oil futures so I've been hovering around the crude oil traders at the office recently Very Happy
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wayne72



Joined: 02 Dec 2005
Posts: 310
Location: Barnsley

PostPosted: Wed Jan 18, 2006 1:21 am    Post subject: Reply with quote

Neily at the peak wrote:
If we peak this year, I would have thought Kunstler's prediction of $100 is nearer the mark.

I would love to see some predictions of just how high it could go within 5 years of peak when that happens! My guess is a lot higher than $100.


Neily-at-the-peak


This is the strange thing (although its not that strange when you really think about it, or if I explain it correctly.) 5 years in to Peak, will probably bring a Paradox, being that Oil prices will fall dramatcally, because A: Recession: Nobody have the money for it, B: Lack of Items which utilise Oil.

It's a complex scenario but it's highly likely. It's explained quite well in a Peak Oil book I read. Someone on here may be able to explain it better than me???
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wayne72



Joined: 02 Dec 2005
Posts: 310
Location: Barnsley

PostPosted: Wed Jan 18, 2006 1:26 am    Post subject: Re: Price forecasting Reply with quote

Tess wrote:
biffvernon wrote:
?Oil could rise to $67 a barrel this year, if oil futures and spot market prices are predictive.


Oil futures aren't predictive as such. While the futures prices do kinda suggest that the market expects spot prices to be $x in y months, traders dont think of it in these terms. For a trader there is really only one value for oil, and the rest of the futures prices are thought of as differentials to the One True Price. These monthly differentials are affected by criteria such as:

* The cost of holding oil in inventory for x months
* A news-driven risk premium (e.g. niggling worries about Iran raise the back of the curve whereas immediate bombs in Nigera raise the front)
* The impact of current and future freight costs (if freight is going to be expensive in June due to lack of shipping, you may need to sell your crude more cheaply in June to keep the overall price for moving it around the world stable).
* The cost of money (ie interest),
* All of which are magnified if inventory is low, or less important if inventory is high.

Therefore there are limits to how much higher the December 06 contract could be relative to February 06. If December rises too high relative to Feb, then ever more crude goes into storage, because it becomes worth waiting to sell later in the year.

In other words, you'd never see Crude oil at $66 today but showing December futures at $100, because all the crude available today would immediately go into storage for the rest of the year, or even be dumped on tankers at anchor, thus causing the prompt price and the Dec futures prices to come much closer together, usually within a few dollars.

So really if traders thought that crude would be $100 in December, the price today would have to be at least $95 due to the economics of storage.

I'm sorry if I'm making no sense. Just trying to give a view of the way traders look at crude oil forward curves. The disappointing thing is you have to have rather a lot of capital on hand to trade futures beyond 2 or 3 months because there's just no liquidity except in the OTC market between the major banks. Inevitably, the easiest place to make money is by trading the spreads between prompt months (eg Feb-06, Mar-06) and more long-dated contracts (Feb-07, Feb-08 etc) (which you and I don't have access to, unless we make a market among ourselves. I may have to set up a website to do that sometime...).

I'm hoping to do my MBA thesis on the trading of crude oil futures so I've been hovering around the crude oil traders at the office recently Very Happy


Not sure if i've understood this post correctly, it is a little confusing Confused . But are you trying to say this is how stock market traders work? Or is this how the Oil Market works?

If its the latter, then it must be wrong as Oil as trebled in price over the last 12 months!
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RevdTess



Joined: 24 Nov 2005
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PostPosted: Wed Jan 18, 2006 2:05 am    Post subject: Re: Price forecasting Reply with quote

wayne72 wrote:
Not sure if i've understood this post correctly, it is a little confusing Confused . But are you trying to say this is how stock market traders work? Or is this how the Oil Market works?


I'm specifically talking about crude oil traders - how they view the market not as a series of price forecasts, but as a single price plus differentials to each month based on criteria like storage, inventory and freight etc. Unfortunately if you're not used to the concept of a futures market (as opposed to say, stock prices) then this wont make a lot of sense Smile
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wayne72



Joined: 02 Dec 2005
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Location: Barnsley

PostPosted: Wed Jan 18, 2006 3:18 am    Post subject: Re: Price forecasting Reply with quote

Tess wrote:
wayne72 wrote:
Not sure if i've understood this post correctly, it is a little confusing Confused . But are you trying to say this is how stock market traders work? Or is this how the Oil Market works?


I'm specifically talking about crude oil traders - how they view the market not as a series of price forecasts, but as a single price plus differentials to each month based on criteria like storage, inventory and freight etc. Unfortunately if you're not used to the concept of a futures market (as opposed to say, stock prices) then this wont make a lot of sense Smile


LOL I've read, re-read then re-read again and i'll be honest, it just won't sink in. Have you got any links to info that can help me, or am I beyond help Laughing

I prefer hitting "Dummies" books on subjects that I find hard to understand.
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biffvernon



Joined: 24 Nov 2005
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PostPosted: Wed Jan 18, 2006 8:45 am    Post subject: Reply with quote

Thanks for that explanation, Tess. I was just amused by the statement "Oil could rise to $67 a barrel this year..." on a day when the price was only a few cents off $67, with another 11 months to go for the prediction to come true. I wondered if it was because the author was writing from a Hawaii beach. Smile
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RevdTess



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PostPosted: Wed Jan 18, 2006 11:32 am    Post subject: Reply with quote

biffvernon wrote:
Thanks for that explanation, Tess. I was just amused by the statement "Oil could rise to $67 a barrel this year..." on a day when the price was only a few cents off $67, with another 11 months to go for the prediction to come true. I wondered if it was because the author was writing from a Hawaii beach. Smile

Very Happy Yeah the writer's being a bit of an idiot. $67 may be the current expected price (on balance of probabilities) in December 06, but there's nothing to say it couldn't rise to $80 in the meantime, or fall to $50.
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Optimistik



Joined: 23 Dec 2005
Posts: 3

PostPosted: Wed Jan 18, 2006 12:13 pm    Post subject: Reply with quote

Futures are't too complicated to understand; essentially you are buying the right to buy oil in the future, so if you think oil will be $100/barrel in December you should buy oil futures at that price. I have only a limited understanding, I'm sure others could explain more...
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DamianB
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Joined: 24 Nov 2005
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PostPosted: Wed Jan 18, 2006 12:59 pm    Post subject: Re: Price forecasting Reply with quote

wayne72 wrote:
LOL I've read, re-read then re-read again and i'll be honest, it just won't sink in.


A lot of people outside the financial markets think that a futures price is an estimate by the market participants (traders, companies, specululators) of what the price will be at that point in time.

The reality is that its a mathematical function of various factors (see Tess's post) and the current (spot or prompt) price.

Here's a simple example:

Suppose storage rates are $0.20/bbl/month, interest rates are 5%pa and the spot price is $64.

The futures price for delivery in 12 months must be 64+(0.20x12)+(64x0.05)=64+1.40+3.20=$68.60
If the futures price was higher than this a trader would take a short (sell) position in the futures market, borrow $64, buy the oil and store it for 12 months. This is known as arbitrage - riskless profit. A year later he waits for his futures position to expire and delivers the oil to the exchange.

If the futures price was lower, a trader would buy a futures contract, borrow the oil, sell it at $64 and invest the money at 5%. A year later he lets the futures contract expire, takes delivery of the oil from the exchange, delivers it back to the lender with the cash interest and pockets the difference.

You can make this as complicated as you like in an attempt to model the 'real' world by guesstimating all the other variables (quantitive or qualitive) and then pitch your model against the market. This essentially is what 'program trades' are - if you believe in your model, you program it into a PC and let the processor execute the trades.
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skeptik



Joined: 24 Nov 2005
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PostPosted: Wed Jan 18, 2006 1:22 pm    Post subject: Re: Price forecasting Reply with quote

wayne72 wrote:

LOL I've read, re-read then re-read again and i'll be honest, it just won't sink in. Have you got any links to info that can help me, or am I beyond help Laughing

a link to info

*
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clv101
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Joined: 24 Nov 2005
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PostPosted: Wed Jan 18, 2006 1:49 pm    Post subject: Reply with quote

Futures Contract
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