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Fascinating debate on speculation in oil

Barry Ritholtz, king of the finance bloggers, dismantles a “60 Minutes” report blaming oil speculators for the fantastic run-up in oil prices last year. His contention: The CBS News newsies left out a host of other factors implicated in the oil run-up.

What set the journalism hounds on the trail of this story was the obvious disconnect last year between prices and demand: Prices were going through the stratosphere while demand was falling off. I concluded it was plainly a bubble caused by too much money chasing too rare a commodity: not necessarily physical oil, but the oil futures contracts by which all oil is purchased.

Plainly this is speculation, but the traders responding to Ritholtz’s comments insist that individual speculators are a) not truly to blame because no individual trader can move markets; b) performing a vital market function in helping establish prices; and c) doing society some good by causing consumers of oil to burn less, which is good for the planet. Another interesting contention: if evil speculators were manipulating markets for their own gain, how did the prices ever correct and return to earth?

Check out the “60 Minutes” report and decide for yourself.

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Tom Mangan posted at 7:41 am January 14th, 2009 |

3 Responses to 'Fascinating debate on speculation in oil'

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  1. Mahkno says:

    There have been articles in the Financial Times (print edition) debunking the claim that speculators were the principle driver in price run up. What they found after looking more closely is that the principle driver were refineries trying to ensure and lock in supply due to increasing demands. Which if you have demand as your principle driver in price, makes sense. No doubt speculator’s were very active in all of the trading but the big boys were indeed the refineries.

    Permalink | Posted January 15th, 2009, at 7:40 am
  2. Tom Mangan says:

    The other problem with blaming “speculators” is that pretty much all commodities are bought and sold on futures markets and every contract purchased is a zero-sum equation with a winner on one side and a loser on the other.

    Everybody in the futures markets is a speculator.

    Oil was the last surviving bull market after the autumn of 2007, creating a blow-off top as shorts and longs fought it out to make sure somebody else was the greatest fool.

    Clearly the last phase was a speculative bubble in the first half of last year. But regular market participants — people in the business of delivering petroleum — also have to swim in these shark-infested waters and many must be tempted to play along while the going’s good.

    Permalink | Posted January 15th, 2009, at 7:59 am
  3. Mahkno says:

    I think when they talk about ‘speculators’ they are talking about people who are simply trading in the futures contracts for the sake of the margin gain and have no other vested interest in the resource.

    Permalink | Posted January 15th, 2009, at 9:45 am

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