Wednesday, July 30, 2008

US gas prices and changing driving habits

A couple of charts from the government are very illuminating on the subject of how Americans have responded to increasing gasoline prices. The first chart shows the moving 12 month average of miles driven on all US roads; the detail data shows that between Jan 1, 2005 and May 31, 2008 the change in this number has been essentially zero. This number has essentially been in a flat range since December 2004. So US drivers were modifying their driving well before gas prices got to $4.00 per gallon; as is demonstrated by the second chart showing gas prices.

The second chart shows the trend in gasoline prices from mid-2007:

So when you combine no growth in miles driven and consumers shifting to more fuel-efficient vehicles you get negative change in demand for gasoline.

Friday, July 18, 2008

Possible keys to living longer

The post Can Exceptional Longevity be Predicted? that hit the Longevity Science blog recently has some interesting findings (based on a small sample, so take them with a grain of salt).

The authors state that "scientists currently disagree on whether a small or a large body size is conducive to exceptional longevity. Historical demographers are confident that small body size is associated with increased mortality, while biologists are firmly convinced that a small body size is preferable for longevity." So if you are of either body type you can take comfort:)

Additionally, "Numerous historical studies have found that body height in young adulthood is a good indicator of a past history of nutritional and infectious diseases. Infectious diseases (and diarrheal diseases in particular) that were highly prevalent in the past clearly led to growth retardation and a shorter body height, making shortness a marker of an unhealthy childhood and impaired health." That doesn't seem too surprising. The followup states "It could be expected that shorter people raised in a less healthy environment would have higher death rates at older ages as well. In his pioneering study published in 1984, Norwegian demographer Hans Waaler found a negative relationship between body height and mortality later in life. Waaler’s initial findings were reproduced later in many other studies, including a famous study of U.S. Union Army Civil War veterans. According to these studies, future centenarians should be taller than their peers." It seems that longevity is yet one more advantage for the tall.

But wait: "Our study confirmed that obesity at young adult age (being stout at 30 years) is detrimental to attaining exceptional longevity, while height is a far less important factor. The findings that a stout build predicts much lower survival rates to age 100 were consistent with existing knowledge that particularly high body mass indexes (BMIs) and obesity are associated with increased mortality."

The question that comes to mind then is what is the effect of a person being not stout until after age 30? In other words, if a person starts to put on a few pounds in the 35-45 age range, is there a significant negative effect on longevity?

Tuesday, July 15, 2008

Oil speculation update

Per Yahoo's AP story, today "Oil prices plummet over $6 amid economic fears"...this is attributed in part as follows..."Analysts also attributed the sell-off to Thursday's expiration of options contracts, which tend to increase volatility, and to computers programed to automatically sell once prices reach certain thresholds"...based on Hussman's commentary in my previous post, spot demand is pretty weak in the US, and given that a large number of expiring contracts were held by speculators(which constitute fictitious demand which crowded out actual end user demand) there is suddenly extra spot supply. Given weak demand and extra supply you get an obvious explanation for the drop in price at option expiration.

"The drop, which eclipsed last Tuesday's slide of $5.33, marked the biggest decline in dollar terms since the Gulf War."

Tuesday, July 08, 2008

Hussman on oil speculation

This is excellent:

"It's sometimes suggested that hedge funds, commodity pools and speculators don't actually drive up the price of oil, because they don't actually take delivery of the physical product – instead rolling their futures contracts over indefinitely or until they close out their positions. From an equilibrium standpoint, however, this argument ignores the zero-sum nature of the futures market.

Producers have an interest in selling their output forward to lock in a predictable price. Similarly, bona-fide hedgers (such as transportation and industrial companies) have an interest in buying their oil forward so they can plan without concern about future fluctuations.To the extent that the speculators begin to take one-sided trend-following positions, their purchase of a futures contract crowds out the purchase that a hedger would otherwise be able to make from a producer.

It doesn't matter that the speculator has no intent to take delivery. What matters is that if the speculators are unbalanced on one side, the producers will have satisfied their need to pledge future delivery. Moreover, because they can lock in a high price, they will be inclined to sell more for future delivery than they otherwise would. Meanwhile bona-fide hedgers will be inclined to buy less on the forward market than they otherwise would. You can see this combination of effects in the commitments data, as a tendency for commercials as a group to become net short following significant price increases in oil.When it comes time for the speculators to roll the contracts forward, they have to sell their existing contracts either to someone who is willing to take delivery, or to a producer who sold the oil forward and can now clear that liability without actually producing the stuff. Given relatively high spot demand and tight supply, these rolling transactions have worked fine to this point, without driving prices lower."

The crowd-out factor is the key; producers only have a finite amount of production to sell.

More evidence of oil speculation

The linked piece states

"The market's bearish turn this week erases, at least for the time being, the effect of a rally that pushed prices past $145 in a string of record-setting sessions before the Fourth of July.
Analysts attributed much of the recent sell-off to profit-taking, saying traders were cashing in on the previous week's gains. ..Still, analysts warned the pullback could be fleeting. "For the time being it's what we call corrective. ... It's a profit-taking pullback that could still be followed by fresh highs down the road," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Ritterbusch said Tuesday's decline may have gained added momentum when computer models used by large investment funds automatically sold oil contracts once prices fell to a pre-set threshold. "A significant part of it's technical," he said of the day's trading. "A lot of these funds don't watch supply and demand fundamentals."

It's right there in black and white...

Thursday, July 03, 2008

Commodities trading and leverage

Yves Smith said
..."One theory as to why commodities are hot it that they are the last game that does NOT require leverage from the banking system. Commodities futures require low margin deposits."
That is part of the answer, I think.

Tuesday, July 01, 2008

Apparently China not the only hoarding location-smoking gun on oil

The linked post at Peak Oil Debunked gives us the smoking gun on oil hoarding by speculators. POD posts excerpts from several main stream journalism sources and I will excerpt the excerpt:

"A LARGE warehouse in Amsterdam may seem an unusual place to attract the City’s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property — oil...Meanwhile, banks such as Morgan Stanley are also beginning to move into the physical market to buy oil — or even entire oilfields.Goldman Sachs recently bought 10m barrels of oil...Morgan Stanley and Deutsche bank recently bought the rights to 36m barrels of oil between 2007 and 2010 direct from a North Sea oilfield.Source"

There it is, plain as day...

"The shrewdest competitors in the energy-trading world these days deal heavily in physical shipments of fuel, not just contracts for the future delivery of such commodities. Owning actual oil, natural gas, propane and even electricity has two big advantages. It provides detailed knowledge of regional supply and demand and the pricing power that comes from holding large quantities of commodities.[...]An explosion in the number of participants in the energy-trading world has led to an increase in so-called physical trading.Dominant commodity traders such as Morgan Stanley and Goldman Sachs Group Inc. long have had strategies to own or lease fuel-storage terminals, oil tankers and power plants to give them more flexibility to hold onto inventory or sell it at opportune moments.More recently, those Wall Street firms have taken physical trading to new levels with bids to buy, not lease, distribution facilities such as pipelines and production facilities including refineries. Hedge funds also have gotten into the game of dealing in physical energy and even metals assets."
So when Goldman makes a forecast for the price of oil, it's based on their knowledge of their own holdings...and since price volatility happens at the margin they are in good shape to take advantage.