Speculators Continue to Drive Oil Higher at Risk of Global Recession

Includes: DBO, OIL, USO
by: Amit Sengupta

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.

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