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.

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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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The Difference Between the SEC Handling of Heinz and Washington’s Handing of the Leak of the SPR in Oil is…

The Difference Between the SEC Handling of Heinz and Washington’s Handing of the Leak of the SPR in Oil is….

petro_reserve3462the SEC took action.  Below is an email sent to a contact in the White House on June 24, 2011 telling the President exactly how to find out which companies might have had inside information.  A contact in the White House was working on the jobs council.  I had also spoken with him about the run up in gas prices.  I realized that, after speaking with him for over 30 minutes, he didn’t understand what I was talking about. It was clear when he asked me how lower gas prices would add to the job market.  I asked him to direct me to the correct people, and I never heard back from him:

From: David Greenberg [mailto:[email protected]greenbergcapital.com]
Sent: Friday, June 24, 2011 4:42 PM
To:  John —[email protected]
Subject: Spr front running. Cftc

Please tell the President that if the CFTC wants to see if there was a leak of news of the SPR information, they need to contact the CME get the crude oil globex records and all orders should have a time stamp-  account number and clearing house.  This is an easy one- –

Also please look at this link from CNBC  http://www.greenbergcapital.com/media.html?id=CNBC-3000029469&sort=0

As far as ideas for jobs when the administration starts a mandate that all buses and trucks run on natural gas. We could start building a network of natural gas stations and terminals across the country.  This would help the energy crisis – put people to work, and help the country stay green.

David Greenberg

President Obama had just made the Statement after the massive sell off a moment before the announcement of the SPR release. The President announced he was going to find out who had the information and go after the speculators who are driving up the world’s oil prices.

The CFTC was one of the agencies that was placed in charge of finding out the information. 

The headline news story was never heard about again.  The real question is why Washington never came forward with their findings. Could it be that a major US trading firm had the information? A firm that might have connected lobbyist? Maybe the SEC was just lucky, the trading firm was not one of the big American banks, and it allows them to look like the hero.  What do you think?  Let me know in the comments below.
Watch an Interview I did on CNBC the night of the SPR release.

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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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Trading Tip #3 – If You Hear the Word “Hope”

Trading Tip #3 – If You Hear the Word “Hope”

THERE IS NO HOPE IN TRADING.  It is like I tell my executive coaching clients who trade – If your thoughts keep returning to “I hope it goes up” or “I hope it goes down”, GET OUT!!!  Get flat and take another look at your view of the market.  Hope is on a date with an old friend of mine and, trust me, it is not going well.  Too many traders are concerned about being flat and missing part of the trades.  Don’t be.  You can always get back in.  No one catches every part of a trade.  Being flat is the best and only way to think clearly, even if its just for a moment.  How many of you have been crushed in a down move by hoping the market would go back up or saying “ this market has to bounce“?  The most important thing about understanding market movements is that the market doesn’t have to do anything.  No one is bigger or smarter than the market, and if you think you are, in time you will be carried out like so many traders before you that you never heard about.
stockYes, there will be times that you get out of a trade and – the moment you do – the market will go your way.  DO NOT WASTE YOUR TIME GETTING UPSET.  I have a lecture named “[email protected]*ng Up and How to Deal with It”, and this is for not only for traders, but for everyone – because the simple and true fact is that everyone [email protected] up.
Traders need to understand that when I traded on the floor,  almost 60% of my trades were bad trades. I could have sat on my butt and kicked the crap out of myself, but if I did, I would have missed so many good trades.  So, if you get out and the market goes you’re way, don’t spend more then a second getting pissed.  Just step back in.
I will explain more  in  Trading tip #4 – Being Able to Admit When Your Wrong …. coming soon.

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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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