My Answers to about the Oil Price Drop to 38USD in HKEJ forum

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http://www.hkej.com/template/forum/php/forum_details.php?blog_posts_id=7284

Chan David Lets set aside the speculators influence on the oil price first. How about the actual users like power plants, vehicles, and air and sea freight?While at the earlier half of 2008 the transportation related companies still madly hedge their price risk by building up long position, the tsunami and the dim future has not only largely damaged their hedging (as they bought expensive oil) but also deeply affected their demand on the future. Combined together, the actual users have no interest on buying oil at all - afterall, they might have already stored a huge pile of expensive oil that may not be used immediately. Although with modern storage technique oil is not perishable in the short-term, the storage still takes fee as well as physical space. With no more spaces available and the expected huge reduction on usage, plus a tight cash flow, they may even want to sell their oil if possible even at a substantial realized loss. Therefore, it is not surprising that the oil futures has dropped like mad despite the "efforts" done by OPEC. 12月19日 12:05


Chan David Lady 海靈心: I am afraid you overlook the factor due to expectation. Oil demand and supply, as well as economic cycle, are not 100% overlap. Before the hard-core really hits the market, the demand on oil was so insatible that the supply could not match (be it physical or peculinar) and drove the future price up. Those companies would really like to buy future oil instead of spot; otherwise, 1 month later the spot price at that time would even be higher than the exercise price of the future contract. Put it in this way, either you buy the oil at future market at premium, or you can't even buy the oil at that time, and your aircraft will be a sitting duck.Now, holding a lot of oil inventory at hand, and a bad future on the business, all they can do is to sell the cheap oil, if possible, in order to get cash, or their abilities to pay back debt will be greatly affected...so much so, it may even affect their abilities to deal with operating expenses. 12月19日 12:38