Study links oil prices to investor speculation

[struggle4progress]

By H. JOSEF HEBERT – 1 day ago

WASHINGTON (AP) — Speculation by large investors — and not supply and demand for oil — were a primary reason for the surge in oil prices during the first half of the year and the more recent price declines, an independent study concluded Wednesday.

The report by Masters Capital Management said investors poured $60 billion into oil futures markets during the first five months of the year as oil prices soared from $95 a barrel in January to $145 a barrel by July.

Since then, these investors have withdrawn $39 billion from those markets as prices have retreated dramatically, the report said. Oil traded at about $102 a barrel Wednesday on the New York Mercantile Exchange.

"We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down," said Michael Masters of Masters Capital Management, calling the amount of money moving into oil futures markets by large institutional investors in the early part of the year "way off the scale." ...

http://ap.google.com/article/ALeqM5gcChYUijMECuNHQJXdgHm5jW5HfAD933VTA00

[ComplimentarySwine]

1. I don't understand how speculation can be separated from supply and demand

As I understand it:

I live in Texas, and because of the hurricane, I am SPECULATING that gas prices will go up tomorrow. As such, I filled my work truck up tonight. So, my speculation has increased demand, and by my buying the gas, the supply has now decreased.

What am I missing here?

[kristopher]

2. Google "pump and dump" for the basic idea

What normally precludes such speculation in commodities is the ability of the commodity suppliers to undercut such speculation by increasing supply. With oil, the industry just spent a lot of money and effort to eliminate excess capacity from the system in order to reduce costs. There is also the possibility that many oil suppliers were/are complicit in the speculation. Finally there is the nature of regulation and the existence of a regulatory 'blind spot' related to oil speculation.