Speculators Continue to Drive Oil Higher at Risk of Global Recession

It is speculation, not a realistic growth in demand, that is driving the unprecedented surge in the prices of crude oil. As crude oil is setting global markets on fire by marching towards $140 per barrel, debate has now turned to how the speculators are jacking up the prices.

Last Friday, the benchmark oil contract crossed the 137, 138 and 139-dollar-per-barrel thresholds for the first time and soared to an all-time high of 139.12.

The weakening of the US dollar is one reason behind the skyrocketing of global oil prices. The recent interest rate cuts by the U.S. Federal Reserve has further depreciated the dollar against the euro which has enticed the buyers with stronger currencies to the oil futures market. Furthermore, the outbreak of the sub-prime mortgage crisis in the United States last summer and the resulting turbulence in the global financial market channeled huge amounts of capital into the oil market. As per some estimates, the speculators control about 1 billion barrels of crude oil in future contracts involving a total of 100 billion U.S. dollars.

While the speculators have benefited from the current round of price surges at the cost of common consumer interests, an uncontrollable rise in fuel prices has created a negative impact on the global economy by causing sluggish consumption, increasing business costs and raising inflation. The rise in the price of oil has now turned the biggest fear factor that is leading the world towards global recession mode.

Comments

[Brian Pursley]

Speculators are merely reacting to the idiocy in Washington. Blame Congress, not speculators. The commodity price is high due to political and not geological factors.

[GLW]

Blame both congress and speculators. As long as congress refuses to open up oil drilling, crude is going to be attractive to speculators. The two go hand in hand. Congress is guaranteeing that domestic supply won't increase and speculators are eating it up. Think of it as a trillion dollar per year tax that congress has put on us - because that's how much more gasoline, oil based, corn based products (because of their stupidity with ethanol subsidies), and transportation costs have added to everything we buy.

A trillion dollars in new taxes a year. Chicken feed compared to Obama will do to taxes and this economy. If you like high oil and gas prices - you ain't seen nothing yet if he gets in and you increase the number of democrats in congress.

[joe of the desert]

I find your article fascinating but I need some help with this question.
If oil is so speculative as you say, and I believe you are right. What happens to the economy, let alone the price of crude if the whole thing tanks..
Joe

[RWB]

Good grief. Do you guys get your blog-comment ideas straight from the RNC? According to the EIA, ANWR has about 11 billion bbl of oil. According BP, in 2007, the U.S. consumed about 20.6 million bbls per day. So ANWR has 531 days worth of oil. Let's say this number is tripled if we add in offshore drilling on the East and West Coast. That's four years worth of oil (assuming we could pull it out of the ground that quickly). And keep in mind that oil is a in international commodity, so any oil we produce and consume here will be priced at the same price as oil from anywhere else (minus differences in price for the quality of the oil--sulfur content, etc.--and transportation costs). We consume about 29% of the world's oil, so adding this much oil into the world supply would drop the price--a little bit. But considering that our share of the world's oil consumption is dropping due to the growth of other economies, that savings is likely to be pretty negligible.

I say this as someone who works in the E&P business and would like to see ANWR and the continental shelf open to more E&P. But I think people need to get some perspective on just how little a difference ANWR would make. Maybe ANWR combined with bringing back the 55 mph speed limit combined with much stricter CAFE standards would make a significant difference. But we can't control how much oil is consumed by other countries, so I doubt if there is anything the U.S. alone can do to significantly change the price of oil.

[Blue Scorpion]

When oil shot up by $13 per barrel in one day last week, the spike was attributed to...(drumroll)....sho... who were forced to cover. Hmmm. You mean there are speculators in the oil market who are betting that the price of oil will go DOWN? Here are thought speculators were only responsible for the oil price going UP!

As much as Uncle Sam lies to us every month with the CPI numbers, the one thing both Paulson and Bodman have gotten correct is that the rise in oil price is due to lays of supply and demand, not speculators. The other factor is the plummeting value of the dollar.

[FXTrader40]

Sort of silly hypothesis. If true, then when oil starts tanking back down to $50, then I guess it has to be them darn "speculators"... as well. Oil is increasing in dollar terms because the dollar is losing its value to just about everything. The causes of this are far and wide, but most critical is the US trade balance. Simply put, America is not selling enough goods that the rest of the world wants. Hence less demand for the the dollar to pay for these things. Blaming speculators (or any other group of people) is usually a last ditch effort to divert attention away from the real cause of problems....right before the end....

[econtakes]

The rise in global prices of energy, specifically oil is part of a two tier economy that the Federal Reserve and the Congress does not understand. Meaning: this is a new temporary paradigm.

Econometrics 2008

[Brian Pursley]

RWB: wer're not just talking about ANWR. We're talking about all of offshore Alaska, Hawaii, Washington, Oregon, California, Florida, Georgia, South Carolina, North Carolina, Virginia, Maryland, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, and Maine. That's over 10,000 miles of undrilled coastline.

[Brian Pursley]

biz.yahoo.com/ap/08061...

"Bush to Congress: Embrace energy exploration now

WASHINGTON (AP) -- With gasoline topping $4 a gallon, President Bush urged Congress on Wednesday to lift its long-standing ban on offshore oil and gas drilling, saying the United States needs to increase its energy production. Democrats quickly rejected the idea."

[Brian Pursley]

www.bloomberg.com/apps...

"Hedge Funds Cut Oil Bets as Prices Rose, CFTC Probed

June 2 (Bloomberg) -- Hedge-fund managers and speculators reduced bets on higher oil prices by 80 percent since July as crude futures rose to records and U.S. regulators started investigating trading, government data show.

So-called speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27 from a record 127,491 on July 31, according to a U.S. Commodity Futures Trading Commission report on May 30."

[starkoski]

Unfortunately you don't understand peak oil. The world must replace 4 MB/D/Year just to make up for existing oil field decline rates and increased demand. It can't do that and now real oil price discovery is going on and oil is going tp $500 by 2013.

[YogiG]

Why are so many people having trouble understanding that daily current world supply has been grater than daily world demadn for the current quarter by almost 2 miilion barrels or more, yet the price has risen at least $40 during this period.

And you don't think the CIFs with a billion worth of contracts sin the last year or so, driven by the greedy fund mangers at Goldman Sachs, JP Morgan, MS and MF Global, with their "analyst reports" are not the reason for the high price of oil, and other commodities...well, dream on...
YG

[YogiG]

Starkoski - look at the recent supply/demand stats---adn look at the increased production stats, that are underway now and are coming on line each quarter over the next two years....plus with the demand destruction that is underway, to even include China this quarter...and you think we have peak oil...we are going to see the peak oil thiery moved out 75 years over the next 3-5 years as all teh new drilling comes into view driven by these high prices...
YG

[scfranklin94]

For every futures contract that is bought, one is sold. For every speculator that made money on rising prices, another lost; in fact since producers usually only hedge (sell) when required to by banks (Exxon doesn't buy or sell any futures), but end users (refineries, chemical companies) hedge (buy) virtually their whole inventory of crude, there is a basic imbalance that is filled by speculators.

Yes, index funds have created massive long positions, but who are these index funds? Most of the time they are pension funds (index funds by definition are one-sided, i.e. long-only) or other investment groups seeking a hedge against rising prices.

Who sold futures to the index funds? Other speculators. What most people don't understand is that there has been and always will be an imbalance of hedgers in the futures markets; remove the speculators and it will make the markets much more volatile. Why? Large physical players will become much more powerful and the ability to corner the oil market for a particular delivery month might become possible.

If a corner, or just the threat of corner occurred, then one would see oil prices that would be truly stratospheric (think $1,000/barrel or more - if you don't believe me look at electric power pricing - when only one side of the market wants to sell or buy, the floor or the sky is the limit).

[Ronmac]

It is baseless articles such as this that make our clueless government try to regulate free markets. This author has no valid points.

[jjason]

Ronmac and others,

If you think that there is no speculation driving up the price of oil then read:

www.star-telegram.com/...

and

www.commerce.senate.go...

These two authors will explain how the public is being cheated by oil futures traders and speculators.

Also, to those of you who are thinking about trading in oil futures or buying oil stocks, reading the two articles I have posted will assist you in your decision making.

[jjason]

To scfranklin... The changes to US law that allowed Enron to cheat the public are the same type of changes that have allowed oil futures traders/speculators to cheat the public.You don't know what you are talking about.

Follow the links in my other post if you want to learn what is going on.

Professor Michael Greenberger lays it all out. Greenberger used to work for the CFTC and he knows how and why the US public is being cheated.

[john s. gordon]

coastline - - hawaii being volcanic is not a likely place to prospect.
> jack

[Ronmac]

jjason...Everyone has opinions, but at least mine are my own, not some links (that I have mostly read before). Point of fact is today, oil down 4+ dollars...so did speculation go down over night.??

Try to learn something about how futures work...scfranklin tried to tell you...but in your case, I guess cluelessness is genetic...

[The wizard of Wall street]

Jjason,

Sorry to burst your bubble dude, but this is pure supply and demand - I read the reports that you refrenced. The problem with the reports is that they do not show proof of the allegations. Where are the numbers to show that this is caused by speculation? The report is just one persons opine on the market. The author of the above article provides does not provide evidence - he even dispels his own views by admitting in his article that the decline in the value of the dollar is a cause for the rise in price. When demand is greater than supply and imbalance is created and the price rises, the decline of the dollars true intrinsic value is the reason for the "high" price of oil. If you really want to blame someone for the cost of oil, blame the Fed. Each time the M3 changes (supply of $) it debases our currency, which increases the cost of goods and services.

[howsie]

ANWR contains 11 billion barrels of crude oil and some people are saying that it would have a negligible effect on dropping the world price of crude. That might be true, but if produced it would generate over one trillion dollars in revenue for us. I'd say that's significant because it would buoy up the dollar.

[tuckfinitee]

Lets see, you have the world's largest economy running an energy deficit for decades, little countries like China, India, Mexico, Venezuela to name a few subsidising gas, but it's speculators? If so they deserve medals all around. How would you like high prices as a result of massive shortages, rationing, industrial shutdowns, and eventually declines through out the world economy. That's the direction we've been headed when you compare energy production with growth. High prices are finally getting us back to work and contact with reality. The US could and should be energy self sufficient this minute. There's no excuse for it.

[monkdonk]

Oil is a non-renewable resource, eventually we will run out of it.
Here is an interesting chain of events that nobody likes to talk about...
1. In 2000, an orbiting space probe discovered evidence of water flows on the surface of Mars. This supported a long held belief that channels and rivulets on Mars surface were created by running water long ago. Water means that life may have existed.
2. Oil is formed from the remains of animals and plants living in a water environment. Over time, the layering of sediment over the remains combined with heat and pressure result in petroleum deposits.
3. Methane was discovered in the Martian atmosphere by the European Mars express orbiting spacecraft. Methane is a hydrocarbon and has been thought to originate, as petroleum, from dead organisms. In the 1990s, a different theory was introduced suggesting that coal and oil may actually derive from methane (usatoday.com/tech/...).
4. In 2000,NASA, in conjunction with the Department of Energy and engineers from the oil and gas companies, band together to invent a robotic drill to drill "the water" from within Mars. (space.com/sciencea...)
5. In 2004, George W. Bush delivers a speech at NASA touting the exploration of the moon, Mars and beyond in the quest for valuable "resources".
6. In 2006, the prototype of the Mars drill is completed and tested.
My point is the government appears to believe that large reserves of petroleum might exist beneath the surface of Mars. Their efforts are clearly aimed at drilling Mars for "useful resources." How will they get the oil back to earth? I don't know. This may seem farfetched but then again look who's president.

[joe of the desert]

Of courser supply and demand are the real culprit. Of course we consume 25% of the oil even though we only represent 5% of the users. We all know that. To think that China, the U.S. and the other consumers have quadrupled their usage and ergo the price of a barrel or crude in three years is nuts!
Speculators play a huge role in this mess. Or my name is not Sub-Prime Loan.