Where I live they always predict on the radio if gas will go up or down tomorrow and get it right. What is involved in making that prediction?
In: 5
Gas generally is aligned directionally with the price of oil. If oil goes up, gas goes up, if oil goes down gas goes.
If people think the price of oil is increasing, they will say that gas may go up. They may be wrong, maybe oil goes down, or no change, but they can still say it. Saying “gas will go up” means nothing until it actually does, and unless you’re putting your money where your mouth is, there’s no penalty for being wrong. They absolutely do not ALWAYS get it right. But economists and traders know the patterns and roughly what to expect. Your local radio etc. isn’t making their own predictions, they probably just look at what someone else is saying.
Example: Gas is going up tomorrow.
For oil, there’s a lot of metrics, such as worldwide oil production, that are very good indicators of the direction oil is trending, so people look to those when they think about what the price will be in the near term.
it’s mostly data mining. basically, you just collect a bunch of data you think might be related to gas prices. then a computer tells you which factors are indeed able to predict them, and it gives you a formula based on those results, and you just use that.
i never tried to explain politics and marcroeconomy to 5 year old but here it goes:
Your mom gives you and your brother a dollar everyday
You both want spend it all on candy
Your brother found a place where he can buy candy cheaper than you and keeps it a secret (or you just can’t go to same store). You complain to your mom and you get more money
Sometimes your mom gives more money to you, sometimes more money to your brother
You negotiate amout of money you will receve from your mom every month based on behaviour
Your brother started stockpile of candy so he can sell it to you for profit
In response you also started a stockpile of candy to sell to your brother
You both sell it only when it benefits seller most
You start give each other a credit in candy and extort services like washing dishes on mowing the lawn on each other when you can’t pay back
Effectively price of candy fluctuates over time and depends on how much candy you want to eat given month
Futures. Futures are a forward contract (sign a contract today for a transaction at a future date) that are standardized for stock exchanges. You can watch the expected future price change based on current market movements. Futures reflect the *expectations* of traders, and thus the market as a whole.
Commodity companies will trade these contracts to hedge against price falls (basically locking in a price for the gas before they actually refine the oil).
Gasoline that you put in your car is refined (heavily processed) from crude oil. At any given point in time you can observe the price of oil as an input into the refinement of gasoline but what can sometimes take time to work it’s way through to the end price of gasoline is the amount of refining capacity available. When refiners are working all out to produce enough supply to meet demand, they generally move the selling price of gasoline higher as demand is very strong and so a price increase will not impact their ability to sell volume (and vice-versa when they have a lot of excess capacity). The difference between where refined gasoline is sold relative to the crude oil input cost is referred to as the “crack spread”. Thus if oil prices move higher today and crack spreads are high, it is likely that gasoline prices are going to move higher in the near term.
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