Perhaps 60% of oil prices today pure speculation
Goldman Sachs and Morgan Stanley today are the two
leading energy trading firms in the United States. Citigroup and JP
Morgan Chase are major players and fund numerous hedge funds as well
who speculate.
In June 2006, oil traded in futures markets at some
$60 a barrel and the Senate investigation estimated that some $25 of
that was due to pure financial speculation. One analyst estimated in
August 2005 that US oil inventory levels suggested WTI crude prices
should be around $25 a barrel, and not $60.
That would mean today that at least $50 to $60 or
more of today’s $115 a barrel price is due to pure hedge fund and
financial institution speculation. However, given the unchanged
equilibrium in global oil supply and demand over recent months amid the
explosive rise in oil futures prices traded on Nymex and ICE exchanges
in New York and London it is more likely that as much as 60% of the
today oil price is pure speculation. No one knows officially except the
tiny handful of energy trading banks in New York and London and they
certainly aren’t talking.
By purchasing large numbers of futures contracts, and thereby pushing up futures
prices to even higher levels than current prices,
speculators have provided a financial incentive for oil companies to
buy even more oil and place it in storage. A refiner will purchase
extra oil today, even if it costs $115 per barrel, if the futures price
is even higher.
As a result, over the past two years crude oil
inventories have been steadily growing, resulting in US crude oil
inventories that are now higher than at any time in the previous eight
years. The large influx of speculative investment into oil futures has
led to a situation where we have both high supplies of crude oil and
high crude oil prices.
Compelling evidence also suggests that the oft-cited
geopolitical, economic, and natural factors do not explain the recent
rise in energy prices can be seen in the actual data on crude oil
supply and demand. Although demand has significantly increased over the
past few years, so have supplies.
Over the past couple of years global crude oil
production has increased along with the increases in demand; in fact,
during this period global supplies have exceeded demand, according to
the US Department of Energy. The US Department of Energy’s Energy
Information Administration (EIA) recently forecast that in the next few
years global surplus production capacity will continue to grow to
between 3 and 5 million barrels per day by 2010, thereby “substantially
thickening the surplus capacity cushion.”
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