So You Want To Get Into The Oil Business?

NPR_Planet_Money_cover_artIf you’re not familiar with NPR’s Planet Money podcast; they cover world news, politics, variety shows, and it’s definitely worth checking out.

We couldn’t help but be drawn into a recent episode, where Planet Money made the brave and somewhat naïve decision to get into the oil business this summer. In a five part-series, they seek to work every angle of the oil business, from getting the stuff out of the ground to funneling into someone’s gas tank. Along the way, they travel to “handshake country” to buy oil, sell it to a middle man, follow the oil from a pipeline to a refinery, and eventually to a gas station in Council Bluffs, Iowa.

Unlike the trillions of revenue coming from the “The Big Dogs of Physical Commodity Trading,” Planet Money only purchases 100 barrels of oil. And instead of drilling for it in the Arctic or offshore in Brazil, they get it from Kansas, of all places (and with a briefcase stuffed with cash). But they run into problems almost immediately. First they had to register with the state of Kansas to be an official purchaser of oil. They only find one Kansas well owner (also a preacher) willing to sell to them, and then the issues of price come to play.

When going to buy their 100 barrels – Jason, the Kansas oil well owner wants to sell it to them at the Oklahoma Sweet price and not any of the other Kansas area oil prices – such as Kansas Common, Central Kansas, Eastern Kansas, Nebraska, and Wyoming Sweet. Jason claims that since there are physically located closer to Oklahoma, and the people that are willing to come pick up that oil are willing to pay the Oklahoma sweet price, that’s what he’s selling it at. Planet Money agrees and gets a slight discount because they are paying in cash. But upon reselling the oil to the middle man who will get it refined, they end up losing around 800 dollars.  And that doesn’t include all the legal counseling and other maneuvers NPR had to jump through.

After they go through the rigmarole of physically purchasing the oil from the ground; they realize they could have done the same thing in Chicago, at the Chicago Mercantile Exchange. They meet a trader with a cow print jacket named, Scott. They learn some of the lingo such as:  “a bag = 1,000, a Valarie = 1, a Monkey = 500.” They also realize that a crude contract is 1,000 barrels, 900 barrels more than the 100 they bought in Kansas.

Perhaps the biggest question they are looking to answer in the series is what actually drives the price of oil, and for the most part they get it right. They first insinuate it’s speculators. But after talking to a purely discretionary speculator, and using phrases like betting and holding onto oil thinking prices will rise, they conclude that sometimes speculators can make prices rise; although they can also make prices fall. Of course, people only complain about speculators when prices are high.

They speak to an economist about other factors and conclude that it’s not one factor, but many factors that push the price of oil. The major factor? Global supply and demand and the fact that oil is different than anything else we buy, because oil has to come out of the ground from somewhere in the world – with the cost to get the oil out of the ground, refine it and ship it vastly different depending on where you are in the world.

Interestingly, they argue that it’s not OPEC, or Oil Sand Production in Canada, or the Saudis that set oil prices these days. They argue that it’s all based on the least expensive barrel someone is able to get their hands on. They argue that it’s the minimum price that will cause producers to turn on their oil wells that becomes the true price gauge, it’s the oil well owner who is willing to accept the smallest profit that sets the price of oil, at least in their opinion. Kind of like Amazon or Walmart driving down prices for the rest of us, that producer willing to earn the least profit (or able to because of ease of getting out of the ground) that sets prices.

Whether you know the inner workings or not, the five-part series is worth the listen! Enjoy!

Here’s the first episode:

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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