Monday, June 23, 2008

Oil - Speculators - Only for the weak minded

A lot has been said in the medi over recent months about the role of speculators in pushing up the price of oil.

The Economist has a good piece on oil. In it, they highlight a key fact that has been overlooked by the feeble-minded: That oil speculators cannot push the price of oil futures above the price that markets are willing to pay for delivery just before expiry.

So for example, if the refinery is only willing to pay $100 per barrel, then that is what the final futures contract must be worth immediately prior to delivery. You then work backward by induction over the earlier contracts.

So if speculators are willing to push up the price of oil, it is only because the refineries are also willing to pay that much for physical delivery. Not the other away around.

A virtual chocolate fish to anyone who can point to a leading politician who actually has publicly acknowledged this.

Of course since when did logic mean an end to populist soundbites.

1 comment:

Matt Nolan said...

Agree 100%.

Furthermore, if futures were driving up the price beyond demand we would get a surplus oil production - leading to rising inventories.

Most accounts state that inventories are not rising (unless we believe that tacit collusion between oil producers is leading to lower supply through some sort of Green and Porter type price game).