Economics Homework Help

Q.2Oil Futures

Read the quote from an article (see below). Attached is an excel spreadsheetwith futures oil prices for Feb 2007 and Oct 2007.

Assume that spot oil was sold on Feb7, 2007 for $57.96 per barrel andit was sold at $82 per barrel on Oct 7, 2007

Q. 2.1 Draw the future oil curves for Feb. and Oct.2007

Q. 2.2 Explain why so much oil was stored in Cushingin Feb but no oil wasstored after mid-July; Are the “reasonsfor Cushing’s crude …disappearing are surprisingly complex…”

Q. 2.3 Why “some financial firms involved in oil trading got into the storage business”?

Q. 2.4 Given:on February 7the spot one-year interest rate was 4%.

Using the table below, show that on February 7 the cost of one-year storage was higher than $3.68 per barrel.

Where Has All The Oil Gone? WSJ Ann Davis Oct. 6, 2007

After Sitting on Crude, Speculators Unload It. The World’s Eyes Fall on Cushing^[1], Oklahoma.

“Since summer, one of North America’s most important oil towns (Cushing, Okla. ) has witnessed a disappearing act. The mammoth storage tanks that blanket the rolling grasslands around this remote prairie town had been filled to the brim with crude oil. (But now these tanks disappeared). Until mid-July, unprecedented conditions in the oil market had given oil companies and speculators alike a financial incentive to sock away oil in storage tanks for sale later. These days, the steel oil tankers on the outskirts of town stretch to the horizon, covering more than nine square miles. The biggest held 575,000 barrels.

… some financial firms, (that had been) involved in oil trading, got into the storage business. That gave them the means to set aside oil when the market wasn’t ripe to sell it profitably, and to take a cut as middlemen.

Butthe steel oil tankers … aren’tthere anymore. Since May, millions of barrels of crude have been sold off, and Cushing’s inventory has fallen by nearly 35%.

The reasons Cushing’s crude has been disappearing are surprisingly complex…”

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^[1] Cushing isn’t located on a major highway or railroad. It’s home to just 8,500 people — if you count the 1,000 or so prison inmates. Downtown has one stand-alone bar, the Buckhorn. At the movie theater near City Hall, tickets cost $1.50, $2 on weekends. Cushing’s position as a global oil crossroads was cemented in 1983 when the New York Mercantile Exchange, or Nymex, designated it as the official delivery point for its new futures contract for light, sweet crude — a grade preferred by gasoline refiners. This Nymex price now serves as a global benchmark. Cushing has also become an important way station for heavier Canadian crude.