We'd be looking at double-barreled buck-shot if oil was still at $140/bbl.
There's only one conclusion I'm drawing from the price of oil seeming to move against supply pressures: traders are counting on economic conditions to destroy more demand than shortages are going to raise prices.
(projected demand / projected supply) must be less than one for this to make sense. To be on the down-slope, integrating
f(t) = demand(t)/supply(t)
where demand(t) = demand at time t
and supply(t) = supply at time t
and dP (delta price) = change in price over time
and f(t) = the ratio of demand to supply. When f(t) falls, price falls. When f(t) rises, price rises. Therefore, we know that if price is falling, f(t) is falling.
First, we calculate the tangent of the price function. We actually don't need to run the equation, we can look up the values and find that. Oil closed at 92.83 today, down 2.88. If we're looking for the effect of LEH's bankruptcy on demand, we can reasonably use this number to see what the market priced in today based on that information. Change in Y over change in X gives us -.031 rounded. That's our instant slope. A line tangent to the price function would have this slope. We'll call our slope function s(x)
Price of oil we'll express as p(x)
This morning at open, p(x) = 95.71
At close, p(x+1) = 92.83
We'll evaluate the market based on discrete units of 1 day (h=1)
Remember your calc: s(x) = [p(x+h)-p(x)]/[p(h)]
We end up with
-.03102 = p(x+1) - p(x) / p(1)
-.03102 = (92.83 - 95.71) / p(1)
-.03102 * p(1) = -2.88
p(1) = 92.84
Close enough; our equation checks.
So, what exactly is s(x) representing? s(x) represents how current conditions are affecting the rate of change of the ratio of projected demand to projected supply. What does a negative value mean? Supply is rising faster than demand is, demand is falling faster than supply, or demand is falling while supply is rising. What does |s(x)| represent? If |s(x)| > 1, supply is outstripping demand. If |s(x)| > 1, there is more demand than supply. (projected)
Where are we in figuring out why the price of oil is falling?
We know:
1) Supply > Demand
2) The ratio of demand to supply is shrinking
What good is all this? If we extrapolate that tomorrow's price:
p(t+1) = p(t) + p(t)*s(t)
some calc:
[p(t+1) + 0) / p(t)] = 1 + s(t)
1+s(t) = p(t+1)/p(t)
Substitute:
1+s(t) = .9699
p(t) = 95.71
.9699 = p(t+1) / 95.71
p(t+1) = 92.83
Our equation checks. How can we use this? Over a known period of time, we can use this system of equations to evaluate projected demand or projected supply as long as we know the supply, demand and price on a given day, and the price on a later date. By running this system, we can determine what supply and what demand the market has priced in for t+1. Enjoy
miskatonic wrote:Over exposure in the oil markets is my guess. Oil isn't a safe harbor anymore? Maybe the oil market was leveraged much like the housing market? I am throwing things out there because I don't really know. I have a very good understanding of peak oil but I am at a loss. It would help to have hard numbers and somebody that is better at math than I am.
Count your blessings that we do not have the upward momentum of oil that we saw in the recent past. . With Lehman Brothers, Fannie Mae, Freddie Mac, and now AIG the return to cheap oil may be the only thing saving the world's bacon at the moment.