Tuesday, May 22, 2018

Supply Means Producing A Good And Customers Being Able To Purchase It

When I teach the shift factors for supply and demand, one is expectation of future price. If buyers expect a significant increase in price in the near future, demand today will rise since consumers will want to beat the higher price.

But firms will reduce supply today, since they would rather wait just a bit and sell at a higher price. That is, the amount they offer for sale today will fall. One textbook, which I think was wrong, said that supply would increase since firms will want to have more to sell when the higher price comes.

But supply means that customers have to be able to buy the product. If a firm produces more, but keeps the goods locked in a warehouse until the price rises, supply has not increased today.

Something like this is happening with oil right now. See Trans-Atlantic Oil-Price Spread Soars as Supply Glut Disappears: Divergence is a sign of how stretched global supplies have become even as U.S. output has marched higher by Alison Sider of The WSJ.

World oil prices are rising and it seems like that would cause U.S. prices to rise. But U.S. prices are lagging behind. Here is an excerpt from the article:

"U.S. oil prices are lagging behind global oil prices climbing toward $80 a barrel, the latest sign of a market that has gone from glutted to exceptionally tight in the past year.

U.S. oil futures are trailing Brent, the global benchmark, by nearly $7 a barrel, settling at $72.24 a barrel on Monday. Last week, the difference was even wider, approaching $8 a barrel, based on closing prices. The two benchmarks haven’t been that far apart since 2015, before U.S. crude could be freely exported.

The divergence is a sign of how stretched global oil supplies have become even as U.S. output has marched higher, overtaking Saudi Arabia and rivaling Russia. That has contributed to soaring U.S. exports, which have hit a record of nearly 2.6 million barrels a day as users clamor for it."


"Lately, Brent has been pulling ahead of West Texas Intermediate, the U.S. benchmark. Tensions in the Middle East and anticipation that renewed sanctions will crimp Iran’s oil exports are having an outsize impact on global prices."


"U.S. oil producers that can get their oil to the Gulf Coast to be loaded onto tankers are reaping the benefits. Pioneer Natural Resources Co. , for example, told investors recently that 95% of its West Texas production flows toward refineries and export facilities at the Gulf, where it fetches prices linked to Brent. That added $16 million to its cash flow in the first quarter.

But others aren’t so lucky: A lot of oil is backing up in West Texas, where there aren’t enough pipelines to get all of the oil to market."

Not all the oil can get to a place where the customers can buy. So it is being produced but not supplied to the market. If it were supplied to the market outside the U.S., that would reduce the world price and there would be less of a gap between the Brent price and the West Texas Intermediate price.

Again, production does not necessarily mean supply. The goods have to be where the customers can buy them.

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