Dave P

Supply and Demand Have Little Relevance in Commodities Prices

Of course, the price of a commodity is governed by the laws of supply and demand. And yes, it also has to do with speculation. The two ideas are not mutually exclusive.

Speculative demand is part of the demand for a commodity. Similarly, when a speculator decides to hold onto his inventory of a commodity because he thinks the price might go higher, that has an impact on supply. I will grant you that speculative demand is very volatile compared to other parts of the demand, but it is still part of the demand.

I thought your argument was going to be somewhat different when I saw the title. What a lot of folks find perplexing is that the price of a commodity might go up even though INVENTORIES are higher. I've heard a lot of pundits claim that proves that supply and demand do not work in the oil industry, for example. Bill O'Reilly is one.

What they are ignoring is that inventories are not the same thing as supply. If you have an econ degree, then you know that mathematically, supply is a CURVE, while inventories are not. Inventories is simply a number.

Supply is a relationship between the price of a product and the quantity that suppliers are willing to supply. The higher the price, the more they are willing to supply. The folks who erroneously equate inventory to supply, however, are effectively assuming that all of the inventories are available for sale at any given time at the market price, whatever it might be. And that is simply not the case. People who hold inventories look for the best price they can get, and they are willing to continue holding them if they are not satisfied with the price that is available. In order to determine what the supply is, you can't just look at the inventories. You've got to get inside the inventory holder's head to find out what his price is. The market system is what does that.