Wednesday, May 21, 2008

Oil : Speculative bubble theory gains ground

Oil prices rose to above $132 a barrel today.

I maintain my position that the prices are being driven more by speculative interests than by actual demand and supply reasons. Key drivers of such interest being institutional money , falling dollar and a weakening global economy.And this thought seems to be gaining ground.

A US Senate committee is hearing testimony of experts on how speculation by institutional investors might be driving commodity prices including oil and food grains.

Michael Masters, a hedge fund manager has disclosed exactly how speculators are the key reason for high commodity price including oil. As per Michael Masters “ What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.”

Read Master's presentation here

The chairman of a Senate oversight committee had said yesterday that they are considering a legislation limiting large institutional investors in commodities markets.

Masters explains in his detailed presentation how $250Bn of speculative money has poured into the commodities markets since 2003, driving the average cost of commodities indexes up 183% without significant increase in demand.

OPEC has already reduced its global demand forecast for 2008, reinforcing the group's belief that factors beyond supply and demand are driving oil prices.

I am coming across more and more such reports and analysis where the views of market experts seems to be turning more and more towards the speculation theory.

What else justifies oil prices rising from $ 100 to $ 132 in a period of few months..?

Also Read:
Dens of Gambling - Oil and food bubble about to burst ?
Are we sitting on a time bomb: The unseen chaos in Indian Economy
Which way would the bubbles burst?
Bubbles waiting to burst