Speculators Gone Wild?

At the risk of becoming involved in the ongoing Paul Krugman/Yves Smith debate regarding the influence of speculators on commodity prices, I direct readers to Colin Barr at CNN Money:

The surge of speculative money into the oil futures pits shows that big financial players are expecting the price of WTI crude to surge well above the recent $105 or so seen last week. If they are right, it will bring $4 gasoline a step closer….

…”It does not get any clearer which way Wall Street is trying to take oil,” says Stephen Schork, who writes the Schork Report energy markets newsletter in Villanova, Pa.

Schork notes that speculators now own nearly six times as many barrels of oil – 268,622 futures contracts representing nearly 269 million barrels – as can be stored at the WTI trading hub in Cushing, Okla. And since the CFTC numbers released Friday only go through last Tuesday, they likely underestimate the degree of speculative fervor building in the energy markets.

Money appears to be flooding into energy markets to chase a sure thing, with potentially severe consequences for a global economy still on the mend.  The article continues:

The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it.

I think this suggests that the recent oil price gains are driven more by speculation that in 2008.  And note that we know how quickly oil prices collapsed when the global recession knocked down energy demand.  So if oil prices are being driven by even more extreme speculative activity today, the possibility for a sharp reversal also exists – the question is whether that reversal comes before or after oil prices bring the global economy to its knees.

Presumably, growing tranquility in the Middle East would cause speculators to run for the exits.  This, however, seems unlikely.  Instead, it might be an interesting time for a large, surprise release from the Strategic Petroleum Reserve.  This is not something I expect or would really argue in of given I don’t think that $100 oil qualifies as a national emergency.  But I would like to understand more about the importance of speculative activity in driving oil prices, and perhaps this is something best understood only by catching a lot of traders on the wrong side of a “sure thing.”

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