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Stuart Burns

Stuart Burns

Stuart is a writer for MetalMiner who operate the largest metals-related media site in the US according to third party ranking sites. With a preemptive…

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Are High Oil Prices Due to Fundamentals or Speculation - Part 2

Not all commentators are convinced the speed of oil price rises or the heights to which they have risen are purely down to fundamentals. Since 2003 the value of the speculative oil futures market has grown more than threefold. At the same time, the amount of oil actually being produced hasn’t risen nearly as much. Speculators this year have been predicting future rises in prices by a factor of 3 to 1, according to US government data. Yet this comes as global production hit an all-time high in February and Cushing is awash with oil – higher supply would normally cool prices. Leah McGrath Goodman, a fellow at the Center for Environmental Journalism at the University of Colorado who writes on futures markets, lays the blame firmly at the door of speculators. Not that she takes issue with the presence of speculators, as she acknowledges they bring liquidity to the markets, but the issue is the huge gearing that current rules allow. Speculators can trade with almost no money down, allowing them to influence prices via large bets, typically with no more than 5-10 percent of the overall value of the trade. Goodman feels this  distorts the markets to the detriment of fair price determination.

Qatari Energy Minister Mohammed Saleh al-Sada agrees, saying world oil supply and demand were balanced, and OPEC could do little to curb a price surge, blaming it on financial speculators. “The fundamentals are all okay with regards to supply,” he told Reuters. “The stocks are all at a healthy level. With regards to speculation, that is nothing that OPEC can do anything about. But apparently that is the main reason why oil prices are at these levels.”

Back to Ed Morse, investors have dramatically increased purchases in high-priced call options for expiry at the end of 2011 and 2012, reflecting speculators anticipation of higher prices over the next 12 months. As pressure builds, that could become self-fulfilling, resulting in increased prices. In a recent Reuters poll, the majority of the 32 major oil traders, bank analysts and hedge fund managers surveyed this week said they expect oil prices to resume their climb later this year after a short-term retreat.

At some point the price of oil is going to impact global growth. The head of the International Monetary Fund warned in February that if oil prices remain around $120 for an extended period, economic growth would be hurt. This week the deputy executive director of the International Energy Agency said the current oil price is already harming global economic growth and is causing mounting concern. No doubt consumers would agree with him as they come to fill up their gas tanks this summer driving season. High oil prices in spite of adequate supply seems like an intractable problem we are going to have to live with.

(Part 1 – Click Here)

By. Stuart Burns

(www.agmetalminer.com) MetalMiner is the largest metals-related media site in the US according to third party ranking sites. With a preemptive global perspective on the issues, trends, strategies, and trade policies that will impact how you source and/or trade metals and related metals services, MetalMiner provides unique insight, analysis, and tools for buyers, purchasing professionals, and everyone else for whom metals and their related markets matter.




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  • Anonymous on April 13 2011 said:
    Let's see now. Ms Goodman writes about futures markets, and comes to the conclusion that speculation is the cause of high oil prices, while I taught financial economics for about 12 years, and wrote a book on the subject, and was invited to the big parties of all my students, and still I come to the conclusion that Ms Goodman doesn't know what she is talking about. Fortunately I am a gentleman, otherwise I would have used some barracks room language. Just tell the lady and anybody else who believes that speculation has caused the problem to make sure that they do not find themselves in a seminar rum or conference with my good self.

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