Speculation explains more about oil prices than anything else
By Kevin G. Hall and Robert A. Rankin | McClatchy Newspapers
Posted on Friday, May 13, 2011
Here's what's credible: Some 70 percent of contracts for future oil delivery are now bought by financial speculators — largely big investment banks and hedge funds — who never take control of the oil. They just flip the contract for a quick profit.
Only about 30 percent of oil contracts are bought by a purchaser that actually intends to use the oil, such as an airline.
They both point to a $15 weekly swing in oil prices in early May and $5 a barrel moves on oil prices in a single day — with no obvious change to supply or demand.
Exxon Mobil Chief Executive Rex Tillerson noted Thursday in testimony before the Senate Finance Committee that this year's oil prices don't make any economic sense, though that's not quite how he put it. He said that current fundamentals and production costs would dictate oil in the range of $60 to $70 a barrel. That's at least $43 cheaper than this year's highs of $113 a barrel reached on April 29 and May 2.
In the 1990s, the ratio of speculative trades to trades made by commercial users of oil was tilted heavily toward users of crude. But from 1991 forward, the big financial players such as Goldman Sachs and J.P. Morgan Chase won exemptions that freed them from limits on how much they could speculate in futures markets.
Prior to the 1990s, speculators made up about 30 percent of the futures market. In the latest reporting period, the ratio on May 3 stood at 68 percent speculators to 32 percent users of oil. Meanwhile, the volume of total reported trades has grown five-fold since 1995, underscoring the impact of speculation on futures markets.
McClatchy provided this graphic to accompany the article:
Posts
No comments:
Post a Comment