IMF: Speculation Playing 'Significant Role' in Oil Price Surge

The recent surge in oil prices cannot be explained by economic factors alone, meaning speculation has played a “significant role,” according to the International Monetary Fund.

In an analysis in its Regional Economic Outlook for the Middle East and Central Asia, the IMF says “The recent surge in the oil price (from $80 to over $100 a barrel) seems to go well beyond what would be indicated by the growth of the world economy.”

Producers in particular argue that fundamentals would yield an oil price of about $80 a barrel, with the rest being the result of speculative activity.

The IMF says one way to get a sense of speculative activity is to compare movements in the real price of oil with the real price of gold. This relationship has been surprisingly close for a long period of time. Gold is well known to be a highly speculative commodity, driven by factors other than derived demand, the IMF said.

“One could reasonably argue that this relationship, which has continued in 2008, is
evidence of speculative behavior in oil. If the oil price does fall significantly in the near term, it may reflect more the unwinding of speculative positions in both gold and oil than indicate that a recession is under way.”

“In summary, it appears that speculation has played a significant role in the run-up in oil prices as the U.S. dollar has weakened and investors have looked for a hedge in oil futures (and gold). ”

As financial market conditions settle down, fundamentals should take over and oil prices should come down further from the highs recently observed.

Comments

[AstonishingInvestor]

Let's talk about the law of supply and demand when talking about oil. The price run up is related to the concept of peak oil and not on speculators. The IMF chart used to justify their case looks like it came straight out of the "how to lie with statistics" book.

[jcrash]

Yeah, because we all know about that peak GOLD theory corollary.

[JREwing]

Now that the IMF says it, I am convinced. HAHAHAHAHAHAHHAHA!

[paultaut]

Let me reiterate for the Umpteenth time, WTI has peaked. Where are the huge light oil pools waiting to be discovered. Light oil is just that LIGHT. You will be very lucky to find it deep.

Iran will stop production at 2 of its fields, no one wants the sour crude already on Tankers waiting to be shipped and they have run out of places to store it.

The Saudi's only have the heavy grade as their reserve capacity, pumping at full capacity will not significantly affect the light grade-WTI.

Oil Sands/shale oil.......... go to a tar pit, thats what has to be refined. Good luck

[BookValue]

Since 2003, the number of futures opened in oil is over 200% higher. The number of futures traded is up almost 300%. Prior to 2003, the year over year price change in oil was 75% inversely correlated to the year over year change in inventories (lower inventory, higher price and vice versa). Since 2003, that correlation has gone to ZERO. When price becomes more correlated to number of open contracts and number of contracts traded instead of the physical inventories, it is known as speculation.

Peak oil is a crock. At $120/barrel, the US has more oil reserves than the entire middle east in the wastelands of Colorado, Wyoming, and Utah in what is known as oil shale, with reserves estimated to be around 2 TRILLION barrels. Initial production of oil from shale is profitable at $80, which would only decrease as extraction methods are tweaked and refined as has happened in the Canadian tar sands.

[JREwing]

Oh yes book value, 2 gazillion barrels of oilshale. How much natgas do you want to burn in order to generate steam in order to get oil out of the shale? And where do you get the sweet stuff from, that you have to blend in with the oil from the shale?

[BookValue]

Actually, you don't need to burn any natural gas. Nuclear power can generate all the steam necessary at much higher thermal efficiencies than can be achieved from natural gas, and it can simultaneously provide abundant electricity.

Yes, the refining of shale oil will be different from WTI, but that is already factored into the estimates that initial extraction from shale is competitive at $80, with efficiencies improving the cost position with time and experience.

[richjoy]

One more time...Yes, there is speculation in the price of oil...and the recent increase looks to be irrational!

...And markets can stay irrational longer than you can stay solvent!

85 million barrels of oil are being pumped from wells daily; there is a world market for more--about 87 million barrels; hence when demand exceeds supply, price rises so the marginal buyers are eliminated.

Has the price risen more than might be expected?...Yes, and that is why we are calling it a bubble, and pointing an accusing finger at speculators.

But the bigger issue is: When will the bubble burst?...Answer: When either demand falls (worldwide recession or something else replaces oil in enough applications), or supply grows sufficiently to produce a surplus (new oil fields come on line, which can take some years after discovery). You will notice I did not mention conservation, which might help in the very short term, but demand growth will soon overtake any benefits of conservation.

Is that so hard to understand?

(In the meantime, with respect to the USA, politics hinder, rather than helping, an improvement in supply. I'm thinking no drilling in ANWAR or coastal regions, environmental regs that effectively prohibit new refineries threats to oil company profits (tax more, get less), and stupid subsidies to corn-based ethanol.)

[JREwing]

Considering, that thanx to silly enviros, it takes about 2 TRILLION years to get Nuke plant built, this doesn't seem to be much of an alternative.

As yesterdays polar bear protection thing indicates, the US seems to be unwilling to produce more oil within the country.

[Jack Yetiv]

Even if the US produces more (and it will over the next few years, by a few percent on oil and maybe 10-20% on nat gas), I believe OPEC countries will REDUCE production to maintain oil above $110, maybe even $120 or more.

In fact, a couple of months ago, one of the oil ministers said, when oil was $110, that "OPEC was happy with the price."

Remember that at $120, OPEC is not getting $120 in say, 2000 dollars. It's getting about $70, given the fall of the dollar. Keep in mind that oil is only a little higher (15%) in INFLATION adjusted dollars compared to 30 years ago.

So, the bottom line is,

Is oil up partially due to supply-demand? YES.

Is it partially up due to speculation? YES.

Is it largely up due to simple inflation? YES. About $100 of it.

And is it lpartially up because the dollar has fallen, separate and apart from general inflation? YES.

Thank god we got this issue resolved.

Next topic?

LOL.

Jack Yetiv

[richjoy]

Jack...agreed, and thanks for the additions.

[BookValue]

Today, we had the best evidence ever that the price of oil is being driven by rampant speculation. The power goes out on ICE, shutting down their electronic trading in oil futures and the price of oil on other exchanges collapses. Then the power is restored on ICE and oil instantly pares its losses.

[AmesTiedeman]

The road to under 100 will be found in June..

[JREwing]

Ames I gotta hand it to you. You almost have a Shakespearean attitude toward being an oil bear:

'I shall fight 'till from my bones my flesh be hacked!' (Is it MacBeth??)

Why don't you just jump on the bandwagon and make some green.
The trend is your friend, my men.

TO BOOKVALUE:

On the contrary. Today we saw the last speculators get out of the June contract and rollover into the July contract. That was 3 bucks worth.
Then guys who actually buy oil jumped in and picked up the pieces and we ended the day flat.

The outage at the ICE had absolutely noting to do with it. In fact after trading at the ICE was resumed Brent actually fell for almost 50 cents before recovering.