You hear it everywhere in the press… “Oil is in a bubble and it’s all down to speculators driving up the price”.

• Reuters reports OPEC Secretary General, Abdullah al-Badri, as saying “Record-high crude prices have nothing to do with supply and demand but rather are caused by speculation…”
• The Market Oracle claims “there’s no (oil) shortage; it’s just gibberish.”
• And Global Research says, “as much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds.”

But I’m telling you now, they are all wrong. The real driver of the price of oil is supply and demand.

Today, I’d like to prove it to you once and for all.

Speculation, speculation, speculation

It’s the cause of all our ills, apparently.

German and US politicians have called for a ban on futures trading to curb this ‘evil practice’.

The US regulator — the Commodities Futures Trading Commission (CTFC) — has launched an investigation… well actually it’s launched a number of investigations. All of them are a waste of time.

The CFTC is trying to figure out how much of the oil price is down to speculation and how much is down to supply-and-demand dynamics… I wish them luck. They’ll need it.

Political pressure has forced the regulator to produce a report that might make them look stupid.

Why? Because…

Long-oil speculation is NOT rising – it’s actually FALLING

It’s almost as if they are trying to shut the stable door after the horse has run over the horizon. In fact, the horse might actually have died after living a long and fulfilling life by the time this report is produced.

Let me prove it…

Net long positions on WTI futures contracts fell 80% to 25,867 contracts on the New York Mercantile Exchange in the week ended 27 May. This compares with a record 127,491 on 31 July LAST YEAR.

You can see the graph of net long positions on futures contracts on the graph below. See the recent plunge in net longs? This actually makes the speculation argument look very, very wrong — and shows the CFTC is wasting its time.

As you can see large crude oil speculation futures have actually fallen…

Net long positions fell during May; investors took profits on positions as the oil price hit all-time highs. This was accelerated last week when futures exchanges started increasing margin requirements as a way of shaking out speculation.

Oil futures trade on ICE Futures (which used to be known as the International Petroleum Exchange) in London and on Nymex in New York. Because futures are leveraged trades, investors have to deposit margin with the clearing house. This is a refundable deposit to cover any sharp losses if the market moves against the trade.

Both these derivatives exchanges have upped margin requirements significantly over the last week — indeed the margin requirement on some contracts has actually been tripled. The aim is to reduce volatility and force out the more speculative players.

LCH.Clearnet (the UK clearing house) said it upped the margin call due to “a change in the nature of the volatility across the oil curves.”

These increases in margin calls last week were therefore partly responsible for the 4.3% fall in the price of the near-month WTI futures contract from its all-time closing high of $133.17 on Wednesday 21 May to $127.35 on Friday of last week.

You have to agree this is hardly spectacular.

Of course, the move would not take all speculative players out of the market; the big players with plenty of cash for margin will just pay up… but the sign is that the speculative element may not be as large as some people think.

The US CFTC is therefore in a quandary. It has to produce a politically-motivated report on oil speculation at a time when speculation is falling.Rather them than me… but at least the report will be a humorous read.

Regards

Garry White
Editor
Smart Commodities UK

P.S. Garry’s Smart Commodities UK resource advisory explores the very profitable world of natural resources and hard assets. He delves into what’s going on in each sector and reveals the exact stocks you should buy as this unprecedented commodities boom fires on.

Source: Why They Are All Wrong About Oil