Why Are Gas Prices So High? Here Are A Few Reasons

Why Are Gas Prices So High?  Here Are A Few Reasons

As an oil trader, I would tell my friends when I get upset about how much it costs to fill up my car.  You know prices are out of control.  Over the years,  I have heard and experienced every excuse in the book for high gas prices.  During my career as a NYMEX crude oil Pit Trader, there have been many real issues for the spikes in gas prices – such as the Gulf War, strikes in volatile oil producing countries, natural disasters like hurricanes, refinery shut downs, and countless speculation issues.

There a few valid reasons why gas prices have spiked again.  Yes, global demand is up.  However, I do not think it is up enough to triple the cost of crude oil and gas that we are seeing.

Electronic trading has a tremendous impact on crude and gas prices.  Once the Exchanges went electronic, it allowed every fund in the world to trade products that were never before on their radar, and now there is too much money coming into markets that were never developed for this level of inflow.  The Energy markets have become more of a financial instrument rather than the supply and demand market that they once were.


Another major factor for this spike is the refinery run rates.  I was in the crude oil pit in 1996, the average annual run rate was 94.1%  In 2001, it was 92.9%.  2006, it was 89.7%.  2011, it had dropped to 86.3%.  Anyone can see this trend and the direction it continues to head.

I remember when the El Paso trader would come into the options ring and buy a large volume of calls.  Then a day or two later there was an “unexpected” pipeline cleaning.   With this happening with the run rates, what incentive do they have to lower gas prices?  The lower run rate works in their favor.

There has not been a new refinery built in the United State in decades.  Additionally, more and more existing refineries are old and  shutting down.  Yet gas prices were an avoided topic by both parties this past election.  It is astonishing that this issue was not a significant part of either party’s platform.

Once again, it is clear that the powerful lobbyist in Washington has the nation’s leaders in their hands.  I always laugh when the gas companies say they are not the issue when it comes to prices.  They always seem to have record profits.

Most people keep their eye on crude oil prices.  However, the fact is crude could drop like a rock and gas prices can remain high.  The refineries need to be regulated and brought back up to full strength.  The roll over from winter to summer gas should not take as long as it does, and it is time for new refineries to be built in the East Coast, Midwest, and West Coast to take the pressure off the consumer.

Take a look at the link below at an interview I gave to CNN a little over 10 years ago.  War with Iraq, 2 million barrels off line and look where oil, gas and heating oil was trading – and you will understand just how off today’s prices are!

I look forward to reading your thoughts on this topic in the comment section!

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Trading Tip #10 – Having a Bad Streak? Try This …

Trading Tip #10 – Having a Bad Streak?  Try This …

All traders go through a bad streak now and then.  The key is to keep them small and manageable.  I started most days in the pit flat.  My thought process was there is enough to trade during the day.  Staying up all night when there was no electronic system and waiting for a call from London was just throwing the dice.  Once NYMEX electronic trading system was on at night, I still felt that coming in to trade after a good night sleep was more important than what I could make staying up all night.

thumbnailHowever, there were those times where just everything I did once the opening bell rang was wrong and I would find that I dug myself into a $5,000 hole (which was my first limit when I would walk out of the pit and regroup.)  There were countless times I would chip my way back to even for the day.  As a trader,we know  that sometimes you win , sometimes you lose and at times  breaking even can be a great  day.

This leads me to Trading Tip #10.  If you are having a bad streak of your own, try doing what I have done countless time.  Chip your way back to even and let it rest.  Even before my first trade, I would write on the back of my trading Pad “(-$5000)” and then, when the bell rang, I would trade as if I was down.  This way I would be more selective on my trading and I would just start chipping away.  As I chipped away, I would adjust my loss numbers on the back of my pad .   When I reached my breakeven point, I would call it a day and walked out up $5000.  Over time, my confidence came back and I went back to my normal style of trading – as I spoke about in Trading Tip #9, which you can read (or reread) here.

Trading has always been, and will always be, a mental game.  Sometimes setting yourself up into a different mental state can be a great way to protect yourself from some of those  bad streaks, and it can help you be a better trader.

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Trading Tip #9 – Trading Styles: Do Not Have Just One

Trading Tip #9 – Trading Styles: Do Not Have Just One

In the late 1980’s, my venture into the trading world began in the Gold pit on COMEX.  The first day was the Friday before Memorial Day weekend.  I walked in and noticed that being in the pit with a badge on was very different from stepping into it as a clerk to give your broker his position. With my heart beating out of my chest, I made my first trade. I bought one contract (100 oz.) and sold it a dime higher.  I made $10.  After commission, it was about $8.  I realized that, during the broker training practice sessions, everyone was a hero.  Once you had real money on the line, trading was decidedly different.

David On Trading FloorI remember forgetting to get flat (having no position) at the end of the day.  I was long one gold contract, and I did not sleep for three days.  Looking back, I realize how embarrassing that was.  Over time, my volume as a trader grew. As I wrote about in Trading Tip #1, it takes time to become aware of your own trading volume.  It is different for everyone. Never compare yourself to anyone else.  It is pointless and will screw up your head.

Each market reacts like a different person with its own mood swings.  Just how angry it gets will determine the amount it moves.  When I began trading, gold was range bound.  Each day was tight and choppy trading.  It forced me to learn to make quick trades.  I never wanted to carry my trading position for long moves.  It is true that singles added up at the end of the day.

In 1990, Iraq invaded Kuwait putting NYMEX on the map.  During this time, COMEX and NYMEX shared the same trading floor.  Crude oil was rocking.   Every day I was pissed off that I was not part of the oil trading action. I finally convinced the person who put me in the pit (at that time most traders were placed in the pit and had a backer, who received 50% of their trading account) to allow me to leave gold and trade crude.

Stepping into the crude oil pit felt like traveling to a new country.  It was an entirely different crowd.  What I thought was a busy day in the gold market was nothing compared to crude.  The market and bodies were flying.  That is when I first felt the real rush of trading on the floor.  Nothing can compare to being in the pit on a busy day.  Look forward to that discussion in future blogs.

I tried to trade crude oil as I did gold; taking profits quickly.  This was an issue for a few reasons.  First of all, since the market had huge ranges, I was leaving a lot of money on the table by getting out too quickly.  Additionally, when I got caught on a trade and could not react fast enough to get out, I got hammered.

Over time, I adapted and developed my second trading style.  Look, load, and ride ‘em.  When I was right, I rode the trades; and if I was wrong, I would just hit the first bid or take the first offer I could find.  As I spoke about in Trading Tip #6, hit the bid, take the offer, and just do the trade!!

There will be fast times, slow times, and times the market channels in whatever market or product you trade.  So many traders get slowly blown out by not adjusting their styles according to how the market is reacting.  Do not be one of them.

Tips for trading when volatility shifts:

  1. When there is a sudden change in the market, cut your size. If the market volatility increases, trade smaller, but ride them longer.
  2. In higher volatile markets, when you are wrong, hit the bid or take the offer -do not hesitate. Remember, no market stays in a high volatility state forever.  Be prepared to change your style.
  3. When the marks calms down, increase your size, but trade to chip it out. Short, quick trades add up.
  4. If the market channels and you are getting chopped up – walk away.  There will be many more trading days in your life.
  5. Do not be an addict – do not trade just to trade.
  6. If the markets get real slow, NEVER trade out of boredom.

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ICE vs. NYSE – Is It time to turn the lights off on the trading floor?


As a former Board member of the New York Mercantile exchange, and after dealing with the ICE while at NYMEX, I find the news today very interesting.

In 2000 the ICE made an offer to NMYEX. Or should I say more of a demand. The demand was that if NYMEX didn’t invest 10% into ICE, then they  would go after all of NYMEX’s products .

This started a war between NYMEX and ICE that continued for years. ICE was founded by members of Goldman Sachs and other of NYMEX’s largest customers. The NYMEX Board under estimated ICE and it continued to grow and take over more market share.

There was a time I felt  a merger between the two companies would  enhance the company’s bottom line and  stock price.  If the two exchanges could cross margin their energy products, it would open up a tremendous amount of equity which, in turn, would enhance volumes and help both exchanges grow.

After the NYMEX IPO, NYMEX and New York Stock Exchange were in talks to merge, but these talks fell apart over pricing and management issues.

If the New York Stock Exchange is smart and understands that the world of trading has changed drastically in the last 10 years, and they are considered old school as well as  losing market share by the year, they will need to consider this possibility of merging or being taken over by the ICE very seriously.

The staff and board of ICE are on the cutting edge and could rebrand the NYSE, which has been left behind on the exchange front. The way that the New York Stock Exchange handle the closing of the exchange for two days during super storm Sandy, that they could’ve easily open the exchange while not opening up the building,  shows me they are concerned about their brand and didn’t want the public to realize that without anybody in the building trading could have continued without issue.

After September 11, 2001, all the exchanges made contingency plans that if New York City was closed down for an extensive period of time the exchanges could still open the next day without issue.

Once again, looking at this deal between ICE and the NYSE, the real question is – is there a way to cross margin products -stocks, futures, and derivatives to free up even more equity which will enhance volumes on both exchanges?

As someone who traded, was President of a Clearinghouse, and was a Board member of a major exchange for seven years as well as an Executive Committee member, I feel ICE taking over the New York Stock Exchange would be very beneficial.

It will be interesting to see how regulators look into this deal. The CFTC had no issue allowing ICE, which is a foreign exchange based in Atlanta, to create and put on their platform a WTI crude look-alike product  and settle it on NYMEX settlements while having no authority to look at positions because ICE was regulated by the FSA in London.

NYMEX still holds the record of any exchanges value on their IPO and the sale of the exchange to the CME.

The debate of this merger will be enjoyable to watch from my perspective. Please feel free to leave comments I look forward to hearing your views.

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Better Off? Electronic Trading vs. Open Out Cry

As the only exchange  Board member in the world that voted against electronic trading, I ask you: As traders and investors are we better off now with electronic trading then with open out cry?Electronic trading volumes are down. They got want they asked for – killing open out cry –  all the exchanges are done with their IPO”s  and people have cashed out.  What’s next for the markets?

Now what is next . . .

Exchange Weekly Volume Tracker as of 11/30

CME volumes were down -16% y/y (+12% m/m) in November; with IR -22%, Equity Index -16%, Energy -17%, FX -5%, Comm & Alt Invst -2% and Metals +11%.

ICE Futures volumes were down -8% y/y (-4% m/m). Swap Futures volumes were down -4% y/y (-9% m/m). CDS weekly cleared volumes were down -29% y/y (-48% m/m) in the US and -40% y/y (-31% m/m) in Europe.

US Cash Equity volumes were down -17% y/y (+2% m/m); with Tape A -17%, Tape B -31% and Tape C -7%. US Options volumes were down -21% y/y (+3% m/m).

European Cash Equity volumes were down -23% y/y (+1% m/m) at DB1, -22% y/y (-11% m/m) at Euronext and -6% y/y (-4% m/m) at LSE. Derivatives volumes were down -31% y/y (-5% m/m) at Eurex and  -1% y/y (+24% m/m) at LIFFE.

Asian Cash Equity volumes were down -9% y/y (+4% m/m) at HKEx, but up +7% y/y (+12% m/m) at SGX. Derivatives were down -8% y/y (-3% m/m) at HKEx, but up +22% y/y (+8% m/m) at SGX.

Latin American Cash volumes were up +12% y/y (+3% m/m) at Bovespa and +12% y/y (-4% m/m) at BMV. Derivatives were down -2% y/y (-11% m/m) at BM&F and -51% y/y (-34% m/m) at MexDer.

CME Group IR through Nov 30

MTD ADV: 4,573,645 (21 days)
Y/Y: -21.81%

QTD ADV: 4,379,664 (44 days)
Y/Y: -7.39%

CME Group Equity Index through Nov 30

MTD ADV: 2,685,385 (21 days)
Y/Y: -15.81%

QTD ADV: 2,516,519 (44 days)
Y/Y: -20.02%

CME Group Energy through Nov 30

MTD ADV: 1,504,996 (21 days)
Y/Y: -17.34%

QTD ADV: 1,587,969 (44 days)
Y/Y: -6.83%

CME Group Others through Nov 30

MTD ADV: 2,281,271 (21 days)
Y/Y: -0.66%

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CFTC Stuck on Position Limits

Earlier this week, Reuters published an article: CFTC staff recommends appeal of commodity limits ruling: source

CFTC web site fact:  The Energy and Environmental Markets Advisory Committee (formerly the Energy Markets Advisory Committee) has not met since September 16, 2009 and the only other meetings were May 13, 2009 and June 10, 2008.

While being a Board Member at the New York Mercantile Exchange (NYMEX), I remember the feeling of always banging my head against the wall when I knew the CFTC was looking into issues of trading improprieties. They always asked the wrong people the wrong questions. I often wondered whether they had their head in the sand for reasons we cannot talk about or if they were just always out-matched

I think it is a little of both.

The CFTC is definitely stuck on position limits when it comes to oil prices and speculation.

When oil was at $114 a barrel in July 2011, I spoke to Bart Chilton, one of the commissioners of the CFTC. I told him the position limits on WTI was not the major issue running the price of crude up. I explained to him there were also accountability limits that allowed traders to exceed their limits once they showed they had the excess money to trade.

However, that was also not the main reason why speculators could move the market to the high prices, I told him (and later also told Commissioner O’Malia) that the major factor in the oil markets was the ICE Brent Cash Settled Crude market.  At NYMEX, by expiration a trader needs to get out of their longs or shorts in the market and this brings a natural leveling off of the product.

ICE settles in cash. Meaning the trader would never have to be concerned about getting out of their longs (yes, this works in reverse in a down market).

Add to the fact that, unlike WTI Crude, there are no weekly reports of how much and where the Brent Crude oil is.  No one really understand their settlement procedure. Even when I was sent to London years ago to try to steal the Brent traders and bring them back to New York to trade – none of them could tell me how the market was settled!

NYMEX WTI Crude settles with the average of the last 20 minutes of trading the day of expiration.

I spoke to Chilton and O’Malia about the need to work together with the FSA, who is the London Equivalent of the CFTC and regulates the ICE exchange.  ICE is a London based Exchange that has their headquarters in Atlanta, and who bought a New York Clearing House that is regulated in London.

ICE only started a optional program to give the CFTC their large trader reports after the run up in crude to $147 a few years ago.

The CFTC was, once again, told a direct way to help stop the speculation in oil prices – they were told that position limits will not only not help but it will drive trading overseas – and the courts rule against it.

And they still can’t let it go.

Washington at its best right?

In time, I will go over conversations I had with them concerning the MF Global blow up and just how they didn’t look into leads that would have answered many questions that are still out there.  We will also be looking at the impending disaster that will come from new concept of the cleared swaps market due to the inability for the CFTC to regulate them properly since they have not even caught up to regulating the new electronic and HFT markets.  Stay tuned!

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