jayjayjay1212

The Oil Bubble Will Meet the Same Fate as Tech, Housing

Very good article.

I don't agree with the 40$ oil statement about industry insiders (Boone Pickens, an insider, sees it at 100$), but still the article is very insightful.

Speculators have an essential role in the oil market, but the so-called index investors (mostly large passive pension funds who look for the diversification benefits of investing in commodities) do not. Index investors do not serve a specific purpose on the market; they only put upward pressure on the price of the barrel that is unfortunately not always corrected by speculators. This has the effect of transfering wealth from net oil importing countries to net exporting countries.

Explanation:

The portfolio of the pension fund that invests in oil will get greater benefits from diversification, but it comes at the expense of its clients (us, individuals) paying significantly more at the pump. Therefore it's actually a very unprofitable and short-sighted strategy by pension funds to invest in oil futures, since their clients lose a lot more than they gain from it!

It would be nice, but unlikely, to see the US government regulate the index investors, and letting speculators do their job.