Wednesday, June 18, 2008

Oil: Its a bubble.

This just in: At least 70% of oil futures contracts held by speculators.

Just how much oil prices are being driven by speculation became clearer yesterday as regulators revealed that Wall Street dealers, hedge funds, pension funds and other speculators hold 70 percent of the leading oil futures contracts traded in New York.

From Futures and Commodities News

Why? My take; The Fed, back in May, allowed Investment Banks (not so regulated, just sayin') to borrow money at the same rate as regulated banks--it's not called the discount rate for nothing.

Speculating on Oil is what they're doing with their new-found wealth. Proof? Morgan Stanley currently owns more oil than Exxon.

And look who predicted that Oil prices would go so high! Morgan Stanley!?

Hmmm. Seems familiar. Oil prices rose mysteriously high in the summer of 2006. Didn't prices go down by labor day?


Steve said...

I believe there is some truth to this, but it's the dog chasing the tail. Speculators are hopping onto the "oil boom" b/c that is where all the money has been and gains are lately, what with financials and other sectors of the stock market losing money.
The problem with speculation, which many debate how much it is actually adding to the cost, is that it's basically the "Enron loophole" we keep hearing about, allowing futures and supplies of energy, in this case oil, to be bought and controlled by NON-energy companies.

djinn said...

That's my definition of a bubble. Just like Tulip Maniain 18th century Holland.

It's just false demand fueled by speculation.

Steve said...

Stimmt! You got me there, haha. But I don't think it's all speculation. My guess is about 20% of the price is speculation. The rest is actual hard numbers related to demand and another good 20% is just the devaluation of the US currency exchange rates. It takes more dollars to buy the same barrel of oil from a foreign country, thus it costs more to US consumers as well. The price should probably be around $100-110 without speculation.
However, that isn't going to lower your gas at the pump much. Days less than $3.00 gasoline is probably a fairy tale.