FOX Translator
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You're at a fruit market. But, instead of just being able to buy apples at this fruit market, you can also sell fruit.
You're not a farmer, so you come to the market to buy some apples and you see two fruit stands. Fruit Stand A on the left
is buying and selling apples at 50 cents apiece. However, Fruit Stand B on the right is buying and selling apples at 53 cents
apiece. People are buying and selling apples at these two stands all the time, and the price at a stand could change at any
moment. But, while you're there, apples are 50 cents and 53 cents, respectively.
You're a smart person, and you quickly
realize that you can buy apples from Stand A and then sell them across the street to Stand B and make a 3-cent profit. But
you have to do it now; you can't wait. So you buy all the apples at Stand A and then run to sell them all to Stand B.
Congratulations.
You've committed fruit-stand arbitrage.
Arbitrage is exactly that: the selling of the same item between two different
markets to make a profit off the mathematical differences in price. However, it's not apples that are traded--the goods in
question are usually stocks, currencies and other securities. Arbitrage happens when you get a stock, usually a common one
like General Electric that's traded on multiple markets (Japan, Hong Kong, U.S., etc¿). The stock is usually worth within
fractions of a penny the same on each of those markets. However, there are often some minor variations.
People who
participate in arbitrage take advantage of these variations--and make a ton of money doing it. As seen in the fruit stand
example, you can make a "riskless profit" from buying and selling apples between different markets.
There are some
big hedge funds that make almost all their money off arbitrage. But, despite this simple example, arbitrage is mathematically
complex--and involves a good portion of risk if you don't know what you're doing. You probably won't be able to participate
in arbitrage directly, but you can always invest in a mutual fund that does.
Home / Markets / Industries / Energy
Friday, May 16, 2008
Oil Surges to Record Close Above $126 a Barrel
Associated Press
![Oil Dollar [276] 2](/images/General/oil_dollar.jpg)
Oil prices shot to new highs again Friday as traders, unimpressed by U.S. and Saudi efforts to boost supply, kept buying on the belief that prices had more room to rise.
Light, sweet crude for June delivery jumped $2.17 to settle at record close of $126.29 on the New York Mercantile Exchange. Earlier in the session, prices surged to $127.82 a barrel, also a new high. It was the eighth time in the past 10 sessions traders rewrote the record books, and the first time prices topped $127 a barrel.
Investors shrugged off news from Saudi Arabia's oil minister, Ali Naimi, that the country increased its production by 300,000 barrels a day last week in response to requests from customers. The market also had little reaction to the Energy Department's announcement said it would cancel shipments into the Strategic Petroleum Reserve for six months beginning July 1.
Oil industry observers questioned whether either move would have a significant effect on soaring energy prices.
"It's ridiculous because I don't think this is going to bring the price down," said Phil Flynn, an analyst at Alaron Trading Corp., of the Energy Department's move.
The effect of Saudi Arabia's move was also not immediately clear. The increase, which went into effect last Saturday, is relatively small, lifting total output from the world's leading producer to 9.45 million barrels per day by June.
The addition of "300,000 barrels won't make a lot of difference," said Mir Yousufuddin, who monitors crude prices for the U.S. Energy Information Administration.
The announcement came during a visit by President George W. Bush, who was in the kingdom to appeal for a more significant increase in production.
Saudi Arabia often adjusts its output to meet demand, and the increase coincides with the start of the peak driving season in the U.S.
"It's a way to raise production without raising production," Flynn said. "I think it was a way to save face."
Saudi Arabia has in the past acknowledged the ability to produce as much as 11 million barrels a day.
Energy traders were more focused on an upward revision of an oil price forecast by Goldman Sachs from $107 to $141 a barrel for the second half of the year. The investment bank is predicting continued swings in oil prices as prices dip at times because of falling demand before again moving higher.
"Accordingly, we would view any pullback in oil, regardless of the size or duration -- although a correction could be as large as 15% -- as an opportunity to re-establish long positions in oil before the summer," Goldman Sachs advised traders.
Oil prices could rise even higher as U.S. demand picks up during the summer months, when gasoline consumption is typically the heaviest. Traders are clearly betting gasoline prices have a way to go too: Gasoline futures jumped to a record $3.2438 a gallon on the Nymex before easing slightly to settle at $3.2235, up 5.777 cents.
In other Nymex trading, heating oil futures rose 8.04 cents to settle at $3.7028 a gallon. Natural gas futures fell 28.4 cents to $11.115 per 1,000 cubic feet.
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