Syria’s Oil Now a Target of Civil War

It was only a matter of time before Syria’s oil industry, sagging as it may be, became a target in the country’s civil war, a conflict that is rapidly devastating Syria’s infrastructure and economy. The latest casualty is now Syria’s modest oil industry, already suffering from lack of modernization. In two separate incidents in the […]

Will the Dutch Disease Kill Hopes Raised by Colombia’s Free Trade Agreement?

After a torturous journey through Congress, the United States-Colombia Trade Promotion Agreement (CTPA), first signed in 2006, came into effect on May 15 of this year. The agreement has raised high hopes in Colombia, for which the United States is by far the largest trading partner. However, while the CTPA was fighting its way through […]

Oil Prices and Trading Mechanics

A report from Reuters (hat tip: Felix Salmon) attributes the wild commodity price moves last week to algorithmic stop-loss trading.

Jim Brown offered these details on the oil trading:

Those funds interviewed said the massive amount of stop losses that were triggered was beyond comprehension…. When the crash finally came the number of positions liquidated was staggering. As each technical level was broken it triggered more stop losses and more short selling to capture the drop….

Credit Suisse analysts said the high frequency and algorithmic trading accounted for about half of all the volume in the oil markets.

Lower Oil Prices

Like a roller coaster ride, 2011 saw oil prices climb gradually, only to fall dramatically this last week. Here I offer my thoughts on some of the key contributing factors.

Let’s begin with the relation between oil prices and the exchange rate. If the dollar depreciates by 1%, the dollar price of oil would have to go up 1% to keep the price paid outside the United States constant. This is a bit simplistic, one reason being that there is usually some third factor, such as a rise in incomes outside the United States, that is causing a change in both real oil prices and the exchange rate. Different factors affect the two series differently, so one might see a 1% depreciation correspond to an increase in dollar oil prices of more or less than 1%, or sometimes even an oil price decline. Between September 2009 and September 2010, a 1% depreciation of the exchange rate was associated on average with a 1.3% increase in the dollar price of commodities like oil or copper. The dollar rose about 3.5% against the euro between Wednesday and Friday, and the 4.5% decline in the price of copper could be pretty well explained by the exchange rate alone based on the recent correlations (3.5 x 1.3 = 4.5). But something more is involved in the 11% drop in the dollar price of crude oil observed those same two days.  

What’s Up with Oil Prices?

Oil prices in New York remain north of $110 this morning–the highest in three years. What’s behind the spike in prices? There’s no shortage of opinion, and it’s not necessarily in agreement. For some perspective, several oil analysts opine on what’s happening via a fresh round of interviews, courtesy of Integrity Research Associates.

Here are some excerpts:

Weekly Jobless Claims Drop by 10k

Weekly filings of new jobless claims continue to drift lower, and that’s encouraging. But oil prices remain elevated and various global risks continue to bubble. That raises the question of whether the falling trend in new filings for unemployment benefits has legs. The recent strength in jobs creation is one reason for answering “yes,” although the fall in new jobless claims is beginning to look weak again.

Overcoming Monopoly Power with Buyer Alliances for Natural Gas

With a few exceptions, Central and Eastern European states are highly dependent on imports of natural gas from Gazprom, the Russian state monopolist. The gas markets in the region are essentially fragmented along national lines, both commercially and physically, thus making them vulnerable to monopoly power. As a result, import prices for Russian gas have been found to be higher in the Baltic States than for example in Germany which benefits from supply source diversification while the Baltic States do not. As is well known, supply source diversification is a crucial mechanism for security of supply – enabling both price competition and lower vulnerability to supply disruptions. However the high fixed costs of the necessary infrastructure and the small size of many Central and Eastern European gas markets makes it uneconomical to organise diversification for each of them separately. The most commonly discussed solution to this problem is to invest in interconnector pipelines so as to transform a set of separate national gas transmission systems into a larger regional system. Arbitrage could then occur throughout this interconnected system, thus helping to overcome price discrimination on the part of a monopoly supplier. If, in addition, one of the countries in such a network were to acquire a new source of supplies – for instance an LNG terminal – then the benefits of diversification could be transmitted throughout the entire group of countries thanks to the possibility of physical arbitrage.

1 2 3 5