Everyonce in awhile the Peak Oil website finds a real gem of an economic analysis or some other thing related to energy markets and energy consumption. The following is a dandy with the source website as well.
Friday, May 6, 2011
Speculation Does Not Explain High Oil and Gasoline Prices? Please!!
WTI (West Texas Intermediate) Crude Oil futures traded at its lowest in almost two months in New York on Thursday, May 5 in its biggest selloff in two years, plunging 8.6% on the day to below the $100 mark (Fig. 1). Brent crude on ICE also dropped as much as $12.17, or 10%, which was the largest in percentage terms not seen since the Lehman Brothers financial crisis, and the largest ever in absolute terms, according to FT.
The epic waterfall was partly due to the combination of a strengthening dollar after European Central Bank President Jean-Claude Trichet said he wouldn’t raise interest rates, and a surging U.S. first time jobless claim that sent oil, silver and other commodities plunging.
Big Speculators Moving Out
There has been a long debate about how much of a role speculators play in the oil market. However, this latest big price move in one day strongly suggests something more than fundamentals is at work.
That is, some big players (i.e. speculators) decided to move out of commodities, either to take profits, or for risk off trades, as crude and gasoline market fundamentals have not changed much since the start of the year to warrant such a run-up of prices in recent months (Fig. 1).
Link Between Oil Storage & Speculation??
Some, like Ezra Klein at The Washington Post, and Jerry Taylor and Peter Van Doren, senior fellows at the Cato Institute, have suggested that speculators are not the ones causing high oil and gasoline prices.
For example, in this article, Klein partly quoted Michael Greenstone, an energy economist at MIT, and concluded that:
“Speculators make money by pulling oil off the market, putting it in inventory, and selling it later…So if you’re seeing speculation, you should be seeing a massive run-up in inventory. And we are seeing a bit of an inventory bump, particularly in recent weeks. But not enough of one.”
Taylor and Van Doren also drew a similar conclusion in an article at Forbes stating that since there’s not a massive increase in oil storage to cause a physical supply shortage, so do ‘put away the torches and pitchforks’ as speculators are not to blame for the rise in oil and gasoline price.
Reality Check – Shorts & Paper Barrels
I guess all four gentlemen live right next door to the U.S. Fed in the ivory tower and just as detached from reality.