Oil jumps more than $25 in one day and a chorus rises to 'stamp out speculators'. But are speculators at the core of the problem? And if so, would reducing speculation lower oil prices?
Economist David H. Wang argues that speculators "may in fact be boosting oil's price" and a partial solution may be to require commodity traders to deposit more money per futures contract, thus reducing the number of speculators. That should lead to smaller price moves for oil, he said.
However, Wang cautioned, that reduction in speculators will also lead to smaller price moves to the downside if and when oil's bearish fundamentals become the market's major concern.
Oil: "The sexiest asset in town"
In Wang's interpretation, policy makers, citizens and others appear to be arguing that speculators are creating an oil bubble or an artificially high price not justified by oil's supply/demand fundamentals, or that speculators are manipulating the market to drive the price higher.
What in fact may be occurring, in Wang's interpretation, is that institutional investors and other traders are simply "putting money to work in the sexiest asset in town." Oil Tuesday afternoon traded down $3.26 to $106.11 per barrel, after surging more than $25 to $130 on Monday afternoon.
"Stocks are not generating a sufficient return, certain bonds are very risky, real estate is in a slump, and utilizes don't have enough price movement. What's left? Commodities, and among these oil has generated a high return on equity, or is a sexy asset class," Wang said. "Reduce the number of speculators and you will reduce price movement, but that will also reduce price movement on the way down."
Energy Trader Jim Dietz largely concurred with Wang. Along with a falling dollar and concern about a larger U.S. budget deficit stemming from the U.S. Treasury's bail-out bill, Dietz said Monday's record $25 price rise was driven by 'speculators' frantically trying to cover short positions after they sensed that the market had reversed from an oil-lower trend to an oil-higher trend. "Are investors boosting the price of oil? Sure. But that's because oil is an attractive investment right now, not because of some collusion or manipulation." Dietz said. "That says more about how other assets are performing than about the oil market." Dietz added that he currently had no open energy trading positions.
Oil Analysis: Economist Wang makes a compelling argument. If the U.S. economy were healthy, with rising earnings and job growth, and with strong, double-digit gains in stock prices, would there be as many 'speculators' chasing return in the oil market? Probably not, which suggest that oil's price is less a function of speculators than of investors and traders seeking a sexy asset, to use Wang's term.
Still, just the same, the view from here argues that the U.S. Congress should empower all relevant regulatory bodies to investigate the oil market, and if necessary, recommend changes to increase transparency.
What's your view? Should the U.S. Government put price controls on oil prices? Or should the market determine oil's price? Let us know what you think.
Reader Comments (Page 1 of 1)
9-23-2008 @ 3:48PM
andyg8180 said...
OH NO... i farted.... Oil supplies may be damaged because of it... i suggest we raise prices immediately just in case...
See, i can do it too...