Regional Prices Solve an Imbalance
During a severely cold
winter in the U.S. Northeast, demand for heating oil soars. To satisfy the
unexpected demand, suppliers begin shopping for incremental supplies, first to
the nearest re-distribution center, probably
New York Harbor.
Market participants quickly see that if they can secure additional supplies,
they can sell them. To secure those supplies, they must outbid others --
others in Europe, for instance. It
quickly becomes clear that participants in New York Harbor
are willing to pay a premium, and are doing so. Suppliers in Europe
respond by selling their supplies in
New York rather than in local markets. As those
new supplies arrive in the northeastern United States and are delivered, the
unusual demand is satisfied. Marketers no longer need extra supplies, and
are thus unwilling to pay a premium. While the rising spot price indicated
the need for new supply, the falling price shows that the need is satisfied.
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