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Comment by paulpauper | Hacker News Reader

It's sorta remarkable how well oil and gas hold their gains compared to other commodities. Oil still at 115+ 3 months after Russia invasion of Ukraine despite no further escalation of war. I wonder if someone could create a strategy of selling delta positive at-the-money strangles on oil and gasoline given the tendency of oil and gas to plateau for a long time but have high implied volatility in the interim, which means more theta capture...have to look into it. Bitcoin, gold, and others do not have this plateau pattern, which goes against the EMH.

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According to Wendover on YouTube, producers have not been increasing production and rather aiming for higher profits.

https://www.youtube.com/watch?v=AQbmpecxS2w

That's monopolitic. If there were a producer that did not participate in the price-fix, and could scale his production up, he'd outcompete the price-fixers. I wonder what keeps this setup in place. Sounds like something you'd fight wars over.

I think you're being sarcastic, but this is basically what OPEC and others do.

OPEC only controls 40% of all supply and often accuses its members of breaking quotas.

Producers seek the profit maximizing price, not the highest price (those aren’t the same).

Would you rather sell 1,000,000 barrels at a profit of $10 per barrel ($10M profit) OR 1,200,000 barrels at a profit of $9 per barrel ($10.8M profit)?

I would rather sell 1,000,000 barrels at a profit of $10 per barrel:

- If I lowered prices to $9, my competitors would follow, and I'd likely sell only 1,000,000 barrels

- I have a finite supply of oil. If I sell 1,000,000 now, I'll have an extra 200,000 to sell at some point in the future. I'd like each barrel to cost as much as possible.

In other words, there are time dynamics. OPEC might only control 40%, but if everyone follows OPEC, everyone wins. If someone breaks from OPEC, other parties have an incentive to break as well.

There are many silent cabals, where parties don't conspire in any explicit way, except by signalling through market prices.

I would rather sell 1,000,000 barrels at a profit of $10 per barrel

Sure, and I'd love to have $1B, but that doesn't mean I'll get it..

Yes there are time dynamics - ramping up production, production delays due to maintenance, prices changes you can't predict. Nobody has a crystal ball.

And OPEC can't even control it's own members, so I'm highly skeptical anyone else follows them.

Humans are great at seeing patterns where there are none. Oil skyrocketed in 2008, everyone said it would never go down, then it crashed below $20. That doesn't seem like the kind of market where suppliers control the price.

> everyone said it would never go down

Citation needed.

The US Gov literally said the current (in 2008) high price are due to demand/supply mismatch and "most industry experts contend that oil resources are plentiful ... Drilling activity is at a high level" [1]. As in the price will go down.

OPEC only needs to control its members a tiny bit. Oil is sold on the margin and so a tiny demand/supply mismatch means a large price difference [2].

[1]: https://www.dallasfed.org/~/media/documents/research/eclett/... [2]: https://www.vox.com/2015/1/5/7493799/oil-prices-chart

Citation? Everyone I spoke with back in 2008? Sure anecdotal, but that's what my comment is basing it on.

Regardless, I think you just proved my point. Supply/demand determines prices not OPEC.

If OPEC controlled prices they wouldn’t have dropped 80% post-2008. Prices were so low that capacity was taken offline and some countries has serious financial difficulties.

That doesn't sounds like a monopolistic market.

I’d set my price to the point where it’s cheaper than the competition - I.e if a country shift more towards nuclear or wind then I’d tempt them back with lower prices.

The correct solution for the consumer is to massively reduce the reliance on oil, but that requires long term planning which democracies and corporations are awful at.

> Producers seek the profit maximizing price, not the highest price (those aren’t the same).

Is this true when you only have fixed amount of the commodity? Wouldn’t players try to optimize the total NPV of all resources sold into the future?

Oil is not a fixed commodity. New reserves are discovered or become economically viable all the time.

That's an interesting point.

Think of it not as production, think of it as extraction, a conversion of crude safely stored in underground vaults to dollars. Holding back has the double benefit of rising prices now and increasing the amount you can sell in the future. The price-fix is not just about keeping it up, it also has an element of not outdoing each other in the "oil futures" speculation that would be implicit in not extracting now. No oil country (well, no oil country except Norway I suppose) would be happy to enjoy a dominant market share now at the cost of having to leave the market earlier than their peers. One might expect that all the talk about CO2 would shift the balance between those two sides within OPEC (and those that tag along?), but habits change slowly.

> there were a producer that did not participate in the price-fix, and could scale his production up, he'd outcompete the price-fixers

New production is capital intensive. It’s currently difficult for oil producers to justify that to investors. The higher prices are only accelerating secular trends towards long-term lower oil demand.

Oil companies aren’t like software companies.

Every barrel they pump is a barrel they can’t pump later on. In fact, the cost of oil extraction generally trends upward over time as “easier” wells are exhausted and more expensive ones are tapped.

Sure, going full steam and selling every barrel available would make for a great 2022, but they may pay the price in the future if they suddenly are out of cheap oil

It differs wildly between producers. Saudi Arabia extracts oil for a few dollars per barrel, while it costs Russia 40-50$.

In the latest (few) Macrovoices podcast it's speculated that OPEC is actually out of capacity. It was mentioned that a Saudi minister also said something along those lines recently.

Well, would you expect him to say "oh we can do it, we just want to make big profits"?

Oil is not a free market commodity, production is tightly controlled by a cartel happy to maximize profits for a limited resource. Not until North American oil sands production ramps up again will prices fall, and producers are cagey because it’s quite expensive and when prices fall they lose a whole lot of money.

I think you mean shale, not oil sands?

In the US the discoveries are mostly oil shale, in Canada its oil sands. Its both.

I have found no rhyme or reason over the huge spike in gas prices other than greed.

Granted, our current president shouldn't have been so negative towards fossil fuels.

That said, he did nothing to create this particular upswing.

My local Chevron gas station 94960 has been fluctuating from $5.50 to 6.40 every other day since Ukraine was invaded.

These oils companies, along with so many other companies, raised prices because they thought they could get away with it. "Let's blame a war. Let's blame inflation.". Oil profits have never been higher. It just smells like cronyism.

I've always wondered why gas prices in the Bay Area are the highest in the nation. While we have huge refineries across the Richmond Bridge.

"Granted, our current president shouldn't have been so negative towards fossil fuels.

That said, he did nothing to create this particular upswing"

Why did you bring it up if it has nothing to do with the current situation?

>I've always wondered why gas prices in the Bay Area are the highest in the nation

Obviously because gas tax in California is the highest in the nation, by quite a margin. CA charges an extra 62.47 cents per gallon, whereas next door Arizona only charges an extra 19 cents per gallon.

https://taxfoundation.org/state-gas-tax-rates-2020/

It’s OPEC not your local gas station. To be fair everybody in the chain is making lots of money, but the high prices come from sanctioning Russia and OPEC not boosting production because they like money and have limited remaining oil.

Lumber can be moved around pretty efficiently and Canada hasn't gone down the "let's invade some neighbours" route.

Unfortunately, for gas, moving it through a pipeline beats LNG ships hands down in efficiency, so Europe cannot simply switch providers. At least not fully so.

Not to mention that Europe simply doesn't have the LNG terminals required to replace their pipeline capacity regardless of efficiency.

Some thoughts that might blow the mind:

A) price of oil/gas was going up well before Russia/Ukraine. Putin’s work is an aggravating factor, but hardly the whole reality of the market challenges.

B) fuel demand is pretty inelastic compared to lumber. The world is still moving into fossil fuels (increasing demand each year), not flatlining, let alone decreasing. When the supply shrinks, we’re all competing for the same limited supply of dino-juice with our fist-full of dollars. [yes, algae and plankton, I know].

B) Fuel demand had a slump due to external factors. And as supply was also somewhat inelastic the priced dropped. Now that we are returning to normal or even increased demand price is sensibly going up. Previous 2 years were anomaly, not the normal.

If you still think EMH is valid after this cycle, I have a monorail to sell you.

Would you like to make explicit to us how you define EMH and his you think that this cycle contradicts it?

It's pretty clear to me that when liquidity runs rampant, valuation doesn't matter, instead momentum and herding take over. How else do you justify a 400% increase in ARKK and a collapse that occurred inline with fiscal and monetary stimulus.

Switching oil providers is not as easy as most people think. Refining facilities are more or less matched to their feedstocks, retro-fitting to other crudes always takes some time and money.

Also, adjusting production and delivery is not an instantaneous process. Especially when you substitute a pipeline-based feedstock (as Europe is doing right now) in favor of tankers. You need tanker capacity, you need to have contracts for this, you need terminals, and you need pipelines from the port to the refining facility.

Things are simply not as easy and supply shocks take time and effort for resolution.

Storing barrels of oil, and selling during the next crisis seems like a sure fire way to make a lot of money.

yes, if only the storage was free, and the commodity easy to transport to areas where demand was.

> yes, if only the storage was free, and the commodity easy to transport to areas where demand was.

Trump tried to do exactly that in the original 2020 COVID stimulus bill: https://www.cnbc.com/amp/2020/03/26/us-suspends-plans-to-buy...

Original plan was to buy $3B worth of oil at about $24/barrel to fill the strategic petroleum reserves. But the Democrats blocked it in the Senate and demanded it’s removal from the bill.

125 million barrels that's like 6 days worth of US daily consumption. It's crazy how much oil the US consumes on a daily basis.

Hello, Strategic Petroleum Reserve !

I think oil and gas is staying high because the sanctions on Russia are staying in place and/or escalating. If the sanctions were removed (say because Putin was deposed) I imagine the prices would plummet

Alternatively, oil is high because there's a cartel interested in maximizing profits, and there's enough dust in the air from world events that they can claim plausible deniability.

It's purely free markets doing what they do - trying to optimize for the point where profits are highest by raising prices until demand drops sufficient to level off total profits. Externalities be damned (environmental, social, economic, etc.)

The cartel just reassessed their output as a result of the continuing war and decided to increase output.

And OPEC cares a lot about externalities. They know that pushing oil prices high enough will cause a recession which leads to less money for them. (They learned this in 1979). So they try to maintain a healthy but not runiously shortsighted profit.

The price of crude oil has been flying to the moon since December 2021. Just look at YTD chart for crude oil. Russian invasion of Ukraine might be one of contributing factors for elevated prices, but it can't be the main one.

Russian oil is still being sold to India, China, and in Europe...

They're price gouging. They learned their lesson from the shale boom and are colluding to keep prices high / aren't re-opening wells for fears of a sharp drop in prices. Remember when crude went negative?

The lesson from the shale boom is that the saudis have no problems with waging a price war to drive them out of business after they’ve made significant upfront investments.

Avoiding investments that you know will result in huge losses isn’t price gouging.

Why would they bother to open anything new. the Biden will require 3 years of environmental review and will not defend against any frivolous lawsuits for any new production or plants

First, they wouldn't need to open anything new. They could reopen existing wells.

Second, pumping oil out of new sites is myopic, at best.

And third, any administration's policies are hardly going to move the needle on the profits oil companies are going to make. They may tell you it's Biden, but that's just convenient cover so folks stop blaming them for problems they could eminently fix.

Even just "turning on" existing wells has large up front costs and takes time to have a positive ROI. Between the threat of OPEC turning on the tap and the threat of administration adopting some policy that dings a percent out of the existing margin the risk is too great for north American operators to pull out the stops and go all in.

It's basically one sector holding the entire rest of the economy hostage for more record breaking profit.

I'd argue for "use it or lose it" laws in basically every sector. Farmland, speculative RE investment, etc. Or a sort of delapidation tax

In b4 'but property rights' they're fundamentally a privelidge granted to you by the 'polis'and protected by the polis for it's own benefit.

It’s hardly myopic. We can’t get to a green future without a healthy energy mix today to get us there.

In that case, oil prices will stay high. Russia is winning the war and so the sanctions will remain in place.

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