What to Blame Speculators For

Monday, March 12, 2012, 8:30 PM:  Thank you, Bill, for keeping those predictions updated.  I think my traveling is now done.  As far as another hike this week over $4, it is a possibility, but I think we are safe for another day or two.

I want to discuss the question of whether or not speculators are responsible for this recent surge of prices from nearly $3 to practically $4.  It is true that retail prices are based on prices which are set further up the supply chain by the futures markets.  I like what Wikipedia has to say about the history of futures markets:  “Gluts and shortages of these products caused chaotic fluctuations in price, and this led to the development of a market enabling grain merchants, processors, and agriculture companies to trade in … contracts to insulate them from the risk of adverse price change and enable them to hedge.”  Farmers, for instance, could work out a futures contract in July to sell their grain in September.  The farmers would deliver their grain in September to processors, who would pay the farmers what they agreed to in July.

These days, though, there is a lot of speculation in the futures markets.  In fact, anyone with a stock brokerage account can speculate on future gas prices by buying and selling an ETF with symbol UGA.  The people who run the ETF buy and sell futures contracts in gasoline.  They aren’t interested in “delivering” gasoline, or, as a food processor would, “taking delivery”.   They just want to profit from changes in the price of gasoline.  And you can, too!

As a result, prices aren’t based as much on the supply and demand for gasoline anymore.  They are based on the moods of speculators.  As a consequence, price moves are magnified — in both directions!  As an example of a steep sell-off in the futures markets, back in January, orange juice futures dropped 10% in one day, after hitting a record high.  The “chaotic fluctuations” are back!

With orange juice, though, as consumers we are shielded from these incredible moves in the futures market, because groceries stores don’t play “the orange juice game”.  However, gasoline retailers, led by Big Red, don’t shield us from the day-to-day moves in the gasoline futures markets.  In the long run, the price of gas probably does reflect supply-and-demand.  In the short run, though, speculation magnifies moves up and down.  Right now, we are dealing with a magnified move up.

Using my daily records, since Election Day 2008, the average price of gas in Grand Rapids has been $2.90 a gallon.  It got as low as $1.45 and as high as $4.29.  $2.90 is probably a good reflection of supply meeting demand these days.  Most everything else has been trading-related nonsense.

Updated: March 12, 2012 — 8:43 pm

30 Comments

Add a Comment
  1. This CNN article makes a good point about speculators, and supply vs. demand: http://j.mp/AbLZaP . To quote a small snippet: “A decade ago, speculators controlled only about 30% of the oil futures market. Today, Wall Street speculators control nearly 80% of this market. Many of those people buying and selling oil in the commodity markets will never use a drop of this oil.”

    The only winners in this are the speculators (raking in money) and the oil companies (likewise). The rest of us here have to pinch and scrape up pennies just to get by. Who knows if it will ever stop either; even if the government steps in (how, I don’t know), there’s no telling what can happen with the pricing.

    Whatever momentum the economy was gaining will surely be hampered again as gas prices rise. Tourism has already taken a hit, with fewer traveling, and others going shorter distances. Prices on everything will go up further as well. Not looking forward to this summer!

    -= Rudy =-

  2. P.S. Has anyone ever figured out what the “summer formula” truly contributes to gas prices? I know that is used as an excuse for some of the spring price hikes, but I wonder how much it really costs the refineries, if anything…

    -= Rudy =-

  3. This week’s Economist has a brief article on this topic. If I read it correctly, they surmise that currently speculation is only causing a small percentage of the increase, while some issues with supply are contributing a larger amount.

  4. If this week’s Michigan rack adjustment is correct (-13.59¢), the Michigan spike line sits at $3.84527 as of 2:37 this afternoon. At that time, the Chicago spot was up 2.81¢ (0.87%) to $3.2605. With an average Michigan retail price of $3.934, the spike line has an 8.873¢ cushion. That could get us to Thursday or Friday morning before the next reset (a small one back to $3.999?), provided the Chicago spot remains relatively stable. (The Chicago spot finished the day up 2.72¢ to $3.2596)

    The Chicago spot has almost caught up with New York April futures, which are up 3.14¢ today to $3.3544. That puts Chicago at a 9.39¢ discount to New York. On the afternoon of February 15, Chicago was at a 65.38¢ discount to the front month New York futures contract (March). On the afternoon of February 15, the Michigan retail average was $3.355. Early that morning, I wrote “Prepare for lift-off.” Since then, the Michigan retail average has increased 57.9¢.

    Prior Chicago spot discounts to New York front month futures:

    FEB 14 2:45 p.m. – 51.94¢ – Chicago $2.4627 – New York (March) $2.9821

    FEB 15 2:51 a.m. – 57.09¢ / 72.9¢ – Chicago $2.4325 – New York (March) $3.0034 / New York (April) $3.1615

    FEB 15 2:16 p.m. – 65.38¢ – Chicago $2.3379 – New York (March) $2.9917

  5. Here are my comments from January 6 about speculators in the energy markets:

    http://www.thegasgame.com/2011/12/30/this-week-notwinning-the-gas-game/#comment-3445

  6. Saw this on Twitter: “If your girlfriend complains that you never take her anywhere expensive.. Take her to the Gas Station.” – @AlexBadovinac

  7. At least we have stopped hearing excuses like refinery ‘fires’, squirrel incidents taking out refineries, angry Nigerians and the like, all very popular in the mid 2000’s. I have to say, if I had to choose between Iran or angry Nigerians and squirrels, I’d choose squirrels any time of the day…

    The same ‘liberal’ press that allegedly gave the current administration a pass on gas prices now has gas prices as a reelection issue on a daily basis. Can’t help but think of the mayor of Chicago I think that lost an election because the snow wasn’t cleaned well enough…

  8. I would like to know why Fort Wayne’s gas price average is always above the average of the state as a whole. Almost always. Sure, I can find a few stations cheaper than the state’s average, but Indy, and almost any other major city is cheaper. The easy answer would be to say “Sucks to be me”. But the city is large enough to not be subjected to rural zone wholesale pricing, and we have plenty of large chain competitive stations. Sorry, I just am curious and don’t know why. If somebody could enlighten me with facts, I would be grateful.
    thanks.

  9. @TimmP: one could say the same for some Detroit communities. It seems that some are perennially higher than others, yet you can drive maybe four or five miles and see a 10 cent drop in prices. I know that smaller “outstate” towns in Michigan command higher prices, and I get the feeling these may be slightly tied to transportation costs from the refineries. BUT…that does not explain Fort Wayne, as I don’t consider it to be a “small town” either. BTW, I’m actually looking at a couple of jobs in Indy…

    @Turbo46032: I still see so-called “disasters” hiking prices every so often, and to be honest after having read a couple of recent articles (including what I linked to above), a lot of that is speculation. The investors only *guess* that prices will go up, so they buy and drive the price up higher, even if the supplies never change.

  10. 6:25 p.m. Thursday, Ides of March

    As I correctly predicted on Tuesday, Speedway reset in Michigan this morning to $3.999.

    I get an extra Gas Game™ point for correctly predicting this day and price on January 4: http://www.thegasgame.com/2011/12/30/this-week-notwinning-the-gas-game/#comment-3438

    However, my January 4 prediction was really for the FIRST time the price would reach $3.999. This is now the third time this year we’ve gone to $3.999.

    The Chicago spot finished down today 1.35¢ (-0.42%) to $3.2185. That makes the new Michigan spike line $3.80075, assuming the huge -13.59¢ rack adjustment is correct. That gives us a healthy 19.825¢ cushion for competitors to chip away at for a summer-like St. Patrick’s weekend.

    Grand Rapids weather forecast (WOOD TV 8):

    Friday: 74/54, a.m. fog
    Saturday: 76/56, 40% chance rain
    Sunday: 72/54, 70% chance rain

    Kalamazoo weather forecast (WWMT TV 3):

    Friday: 76/58
    Saturday: 77/58, 40% chance rain
    Sunday: 75/56, 40% chance rain

    For Kalamazoo, the average highs for March 16, 17, and 18 are 47, 47, and 48.

    For Kalamazoo, the record highs for March 16, 17, and 18 are 72 °F (1977), 73 °F (1966), and 72 °F (1966), so we’ll likely be breaking records all weekend.

  11. Current Fort Wayne, Indiana regular unleaded (E-10, 87 octane) gasoline price according to GasBuddy: $3.897

    Gasbuddy average for Indiana: $3.913 (1.6¢ higher than Fort Wayne)

    AAA Fort Wayne average: $3.934

    AAA Indiana average: $3.907 (2.7¢ lower than Fort Wayne)

    The GasBuddy averages are continuously updated, while AAA’s data is updated only once a day, at 3 a.m. AAA’s information is only useful when it is fresh very early in the morning. Otherwise, it is basically day old information.

    If we look at GasBuddy’s “yesterday” averages:

    Fort Wayne: $3.92

    Indiana: $3.904 (1.6¢ lower than Fort Wayne)

    The apparent explanation is Fort Wayne does not suffer The Speedway Effect™. There appear to be only 9 Speedway stations in the area (8 in Ft. Wayne and 1 in New Haven). While all the Speedways in this area remain $3.849 to $3.919, 17 of the 19 Kalamazoo area Speedways are currently reported at $3.999, with the 2 Paw Paw locations reported at $3.979. The Kalamazoo area definitely suffers from The Speedway Effect™.

    Not only does the Kalamazoo area have more Speedways, but also Kalamazoo County has a smaller population (250,331) than Allen County (355,329). However, Kalamazoo County has less land area (561.66 sq. miles) than Allen County (657.31 sq. miles). Yet, the Fort Wayne area is more densely populated (540.6 people per square mile) than the Kalamazoo area (445.7/sq. mi), so Ft. Wayne comes out as the larger city with half as many Speedways.

    One thing Grand Rapids/Kalamazoo and Fort Wayne share is LIN TV in their markets. LIN TV owns Channels 8/41/WXSP in Grand Rapids and WANE in Fort Wayne. You’ll notice how woodtv dot com and wane dot com have the same layout. I do occasionally see WANE and WISH (Indianapolis) vehicles traveling through Kalamazoo.

  12. Thank you Diether Haenicke. The analysis seems to say and explain it all. Apparently, Fort Wayne has enough large chains to compete with each other, and stay relatively competitive, but not enough Speedways to change the pricing resets as fast as in other locations. In watching Gasbuddy several times a day, have noticed that sometimes, the price for the state of Indiana climbs a whole day or more before Fort Wayne proper does. This would seem to indicate that Speedway does not have the same power of price resets that they do in other localities. Also, the “climb down” in pricing may not occur as quickly either. This does not seem to level out Fort Wayne’s pricing. Looking at Gasbuddy’s graphs seems to indicate a pricing Lag, rather than a leveling.

  13. One final word. I have been watching closely the graphs on Gasbuddy now for almost 3 years. I mainly use the One Month function, watching Fort Wayne, Indiana, and Ohio. It was not until the end of 2011, and into 2012 that I saw any significant time at all that Fort Wayne was cheaper than Indiana. This trend of Fort Wayne being slower to change price seems to be somewhat recent phenom. So when I was asking about Fort Wayne having higher retail prices than the state as a whole, I was framing that with my experience of the previous years, rather than the recent couple months.

    Additionally what I have noticed, is that when Fort Wayne does a reset, it is faster, and higher than the state. Meaning that the prices need to fall faster than statewide prices in order for prices to fall below state average. 2/26 and 3/7 (in Gasbuddy http://www.IndianaGasPrices.com/retail_price_chart.aspx?city1=Indiana&city2=Ohio&city3=FtWayne&crude=y&tme=3&units=us ) would be March examples. Feb 2nd is a perfect example of the delayed, but higher reset I was talking about. And in the above graph, you see mostly Fort Wayne, prior to January 6th, priced higher than the state of Indiana.

  14. This morning’s Fort Wayne vs. Indiana statewide GasBuddy average price comparison:

    $3.888 Fort Wayne
    $3.905 Indiana (1.7¢ higher than Ft. Wayne)

    In addition, Speedway prices in Fort Wayne remain the same as they were yesterday, $3.849 to $3.909, except the highest price yesterday was $3.919. In Kalamazoo, the metro average is now $3.988 and 15 of 19 Speedways are $3.999 (2 in Paw Paw are $3.979 and 2 on Gull Rd. are $3.939 and $3.949). I don’t know who lowered prices on Gull Rd., but I’m guessing Bob & Kay’s Shell or Meijer.

    The national average continues to climb and is now at $3.800.

    Where in Indiana are prices above the state average? Among the metro areas GasBuddy calculates averages for, only Gary, where the average is $4.157. Speedways there are currently as high as $4.199. That makes Gary the nation’s 20th highest metro average (among metros calculated by GasBuddy) and the second highest metro outside California and Hawai?i. Chicago gets the top spot outside of the west coast, with an average of $4.336. Why is Gary so high? I think an EPA requirement for reformulated fuel is part of the reason. It certainly isn’t distance to a refinery, because there are 3 nearby, the closest being the big BP plant in Whiting, Indiana, which has a 405,000 barrel per day capacity. Apparently, that refinery alone has the largest affect on the Chicago spot market.

  15. The Chicago spot settled Friday UP 7.34¢ (+2.28%) to $3.2919. This moved the Michigan spike line up to $3.878554. The Michigan retail average is now $3.955, giving the spike line a 7.6446¢ cushion.

    I am most curious about what happens Monday to our large -13.59¢ Michigan rack adjustment. Without that, the spike line would move up to $4.014454 and we’d see retail prices of $4.199 or $4.259.

    Chicago paralleled the New York market on Friday, which settled up 6.84¢ to $3.3569.

    We could finally breech $4 on Tuesday (though there are some independent stations that have already been at $4 this year). If you’re concerned about this, $3.899 is the lowest price in Kalamazoo right now ($3.879 in Richland). In Grand Rapids, the Circle K in Kentwood at 44th & Eastern is dragging Speedway down to $3.869.

    The national average is now $3.810.

    I keep seeing Gene’s Service in Norton Shores topping the list for highest price in Michigan ($4.369 now). It is starting to replace the BP next to Detroit Metro airport ($4.299) for the consistently highest price in the state.

  16. The Chicago spot market closed today UP 1.59¢ (+0.48%) to $3.3078, paralleling the 1.09¢ rise in New York April futures to $3.3678. Using last week’s generous -13.59¢ rack adjustment, this moves the Michigan spike line up to $3.895408. The Michigan retail average is $3.955, giving The Spike Line a 5.9592¢ cushion.

    While I have no particular reason to expect an increase tomorrow (Tuesday), that generous rack adjustment and small cushion are enough reason for concern. We’d probably go back to $3.999 again for the 4th time, but eventually we’ll have to surpass $4.

    If you’re concerned, $3.899 remains the lowest price in Kalamazoo, with $3.879 in Richland.

    In Grand Rapids, $3.869 is available at 7 locations in Kentwood and southeast Grand Rapids.

    $3.959 – best price in Saint Joseph
    $3.929 – lowest price in Battle Creek (not at a membership club)
    $3.929 – best price in South Haven
    $3.919 – lowest price in Muskegon (not at a membership club)
    $3.899 – best price in Holland
    $3.899 – best price in Benton Harbor
    $3.889 – best price in Grand Haven

    After Caro, Sturgis has the second lowest prices in Michigan at $3.689. Of the 15 lowest prices in the state, 6 are at Admiral stations.

    Gene’s Service in Norton Shores continues to have the highest price in Michigan at $4.369. The BP next to Detroit Metro Airport is the second highest at $4.299.

    Based on transportation cost, the vicinity of Sault Saint Marie probably should be the highest. Prices there are currently $3.929 to $4.059. Marquette is $3.979 to $4.049. In Iron Mountain, all 4 stations (3 of them Citgo) are $4.049.

  17. ChrisDG74, Cincinnati, OH

    Speedway jumping to $3.999 in Ohio at this moment.

  18. This one caught me completely by surprise. $4.099 in most places in Fort Wayne. I figured we had till Wed or Thursday. Sigh!

  19. Everything in GR going to $3.99 too – evidently a weekly process now.

  20. I was flying a little blind, but I still correctly predicted today’s reset to $3.999 in Michigan.

    On Sunday, I correctly predicted the day (Tuesday) in my post above on 18 Mar 2012 at 5:04 pm.

    On Monday, I correctly predicted the day and price (Tuesday, $3.999) in my post above on 19 Mar 2012 at 7:04 pm ( http://www.thegasgame.com/2012/03/12/what-to-blame-speculators-for/#comment-3593 ).

    The Chicago spot settled down .97¢ (-0.29%) today to $3.2981.

    Instead of decreasing, the Michigan rack adjustment for this week has increased to -21.53¢. I’m guessing that reflects end of season (winter) surplus of conventional formula gasoline. That rack adjustment should dry up as soon as refiners begin retooling to produce summer boutique fuels. Without that huge rack adjustment (the largest I’ve ever noticed), retail prices now would be at $4.259. I predict we will see that price on or before April 20.

    The Michigan average is now $3.981.

    The national average is now $3.836.

    Three west Michigan stations currently show up among the 15 highest prices in the state:

    1. $4.369 at Gene’s Service in Norton Shores

    4. $4.219 at Plaza One in New Buffalo

    15. $4.139 at Marathon in Battle Creek on M-66 and H Dr. S.

  21. So, anyone cares to predict how long before verbal pitchforks begin to appear at the political level?

  22. Any minute now… The Democrats find themselves in a very prickly situation. Any kind of move to lower gas prices (i.e. allowing more drilling) goes against their base. Though allowing fuel prices to continue to rise, will stunt any recovery the economy is trying to make. Where the economy and gas prices go, so does the election.

    I believe Diether to be correct, when the summer blends come out, watch gas prices jump .25 – .35 cents… Then watch the Presidents approval rating drop into the the 20% range.

    I don’t know why we aren’t filling our gas tanks with algae?

  23. It looks as though a lot of Fort Wayne stations are backing off the $4.099 in favor of down to $3.999.

  24. The problem with the political attacks is that gas was $5 and $6 under Bush. They couldn’t just create cheaper prices. Then the President has the right to end the crazy speculation and then the GOP will cry foul.

  25. Very interesting discussion of Fort Wayne prices vs. elsewhere. I track Fort Wayne because I grew up there, and they are usually cheaper than Grand Rapids, from what I see. Some of that is due to the difference in gas taxes between the two states. Some is due to better competition there.

  26. In Ohio I never saw gas prices over $4.09 with Bush. Believe me, I’m not a Bush fan. Though on July 4th 2008, he went on TV and said he was eliminating the moratorium on off shore drilling. Gas prices dropped .75 cents in three weeks. The speculators dropped the price of oil fast, just on the thought of more oil being produced. Don’t tell me increasing supply won’t keep gas prices down.Big O doesn’t have that option… His tree hugging base would throw such a tantrum, he couldn’t get elected dog catcher.

  27. The Chicago spot settled down a whopping 1/10¢ today (-.03%) to $3.2971. This roughly paralleled New York April futures, which settled down .6¢ to $3.3571.

    Meanwhile, the national retail averaged continued its climb, up 1.2¢ since yesterday to $3.848. The Michigan average rose .6¢ to $3.987.

    TimmP wrote: “It looks as though a lot of Fort Wayne stations are backing off the $4.099 in favor of down to $3.999.”

    That is why when the numbers show Speedway should go to $4.099, I say they will just go to $3.999. Competition won’t support a price that close to $3.999 and Speedway knows it, so they don’t bother resetting to $4.099, at least on the way up. Once they finally crash through the $4 barrier to $4.199, some $4.099 resets are possible. While $3.999 means like a 10¢ margin, at least the price stays there for days on end, rather than prices going down a penny or 3 every day, which is extra work for stations with manual signs (as well as whatever corporate approval individual stations apparently need to lower prices, and work for that corporate office person).

    I will point out that I know for a fact that at Speedways with electronic signs, the signs are not tied in with the gas pump price control. When prices most recently increased to $3.699, I saw a Speedway roadside sign at $3.779, which I think happened to be the diesel price at that point (now $4.159). Knowing this was very atypical Speedway behavior (not only was a reset not due, it was too small of an increase, and not a price ending in 5 or 9), I checked the pumps. The pumps were all $3.699. I went into the store and pointed out the error and they immediately lowered the price on the roadside sign by 8¢. So, on one occasion, I personally contributed to lower gas prices, sort of. I guess people who “hate” Speedway would have let the error stand and the station lose convenience store business to the competition. I was more curious about the error, rather than whether correcting it would have benefited Speedway or not.

    jbindy wrote: “The problem with the political attacks is that gas was $5 and $6 under Bush.”

    That isn’t even remotely true. The all time national average peak (according to AAA) was $4.114 on July 17, 2008. For Michigan, also according to AAA, the all time state average peak was $4.259 on May 4, 2011. I’m talking about regular unleaded (87 octane, E-10) gasoline sold by the gallon in the United States. It is true there are a few individual stations across the country that currently sell for that high, such as the following stations in Florida selling for $5.899:

    * Suncoast Energys, Orlando

    * Sun Gas, Orlando

    * Shell, 8788 Vineland Ave., Lake Buena Vista

    Here are other places you can buy gas in the United States for $4.999 or more:

    $4.999 – Chevron – Princeville, Hawai’i

    $4.999 – locations in Baker, Hayward, and 2 in Needles, California

    $5.099 – Shell – 920 S. 1st St. – King City, California

    $5.099 – Chevron – 901 N. Alameda St. – Los Angeles, California

    $5.319 – Mobil – 201 S. Azusa Ave. – West Covina, California

    $5.399 – Exxon – 2708 Virginia Ave. NW – Washington, District of Columbia

    $5.999 – Chevron – 811 W. Olympic Blvd. – Los Angeles, California

    $6.139 – Crowley – Bethel, Alaska

    $6.339 – Quick Food Center – Bethel, Alaska

    $6.349 – Northstar Gas – Bethel, Alaska

    $6.349 – Nicholsons Auto Inc. – Bethel, Alaska

    (the lowest price in Alaska now is $4.069)

    Yes, Bethel, Alaska is a remote island “accessible only by air and river.” I believe this was the place that can’t get fuel deliveries during the winter (rivers freeze over) and their last river barge or 2 going into this winter couldn’t make it, so they had to fly fuel in, which is very heavy, and very expensive to transport by air. Because there are no road routes to the city, it is very expensive to deliver vehicles there. As a result, almost everyone takes a cab when they want to ride in a car, resulting in this Wikipedia quote:

    “The town’s single paved road—about 10 miles—supports a surprisingly large taxicab industry. With 93 taxi drivers, the town has more cab drivers per capita than any other city in the country, making it the unlikely taxicab capital of the United States. Most local cab drivers are Albanian or South Korean immigrants lured north by reports of good money.”

  28. ChrisDG74, Cincinnati, OH

    The Real Truth

    —Living in Ohio, I can tell you that we saw $4.299 in the Cincinnati area in 2008. Soon after that 75-cent drop you speak of, a hurricane went through Texas. Retail in SW Ohio went from $3.49 on a Sat am, to $3.69 Sat pm, to $3.99 Sun am. And, a lot of stations went to $4.299 Monday, as other stations were running out of regular unleaded.

  29. Chris, the Hurricane you speak of did little to reduce gas supplies. In my section of Ohio, we did not see such rediculous price jumps. The prices you are referring too were knee jerk reactions by isolated distributors and retailers. I remember at the time, there was a call for action on price gouging and those prices dropped rapidly…
    Now.. George Bush and the Republican controlled Congress had 6 unobstructed years to do something about our energy situation and failed to act. In my opinion, those six years of Republican control are possibly the most pathetic example of leadership in the history of this Nation. During those six years, the budget could have been balanced, Social Security and Medicare could have been stabilized and a responsible route to energy independence could have been put in place. Instead we got “No Child Left Behind”, “The TSA” and “The Department Of Homeland Security”… That’s very disappointing..

  30. ChrisDG74, Cincinnati, OH

    Truth – Believe me, I know it did nothing to supply, and that it was just a knee-jerk reaction (led by Greedway, as usual). I was just pointing out that prices DID top $4.09 in 2008, even if just for a few days.
    And you’re right, those first six years of “W” were a total joke. Not that the last 5 have really been any better.
    I’d better stop. I feel a rant coming on…….

Leave a Reply

Your email address will not be published. Required fields are marked *

Please leave these two fields as-is:

Protected by Invisible Defender. Showed 403 to 1,575,847 bad guys.

 

TheGasGame.com (c) 2017 Frontier Theme