Would someone explain the process how oil speculators make prices rise?

[HardWorkingDem]

Is it because they hold on to oil assets in belief the prices will rise, therefore creating a shortage?

Thanks...

[jaksavage]

1. More buyers crowding in

Drives the price up through competitive bidding.

[no_hypocrisy]

2. Investors sell their shares of stock, making the DOW go down,

and take their profits and invest them in oil futures, which increases the price of oil prospectively and at the gas pump.

[Vincardog]

3. The same way speculation in the stock market drove the market to such heights before the crash.

The same way speculation in tulips ruined the Dutch.
The same way unrestrained capital ruins everything it touches
unless their is some governmental limits placed on it.

[izquierdista]

4. Speculation - good and bad

Speculation was initially thought to be a good thing. It increases liquidity in a market, so that when corn farmers all have a crop to deliver right after harvest, speculation can spread the sales out throughout the year. Speculators also add liquidity to the stock market because they hold assets for a short term, and when someone who holds for the long term wants to sell, there is a ready buyer.

That said, a reasonable person can wonder if there is such a thing as too much speculation. One who idolizes the free market would recoil in horror at even the suggestion, but at some point, when speculation has become a feeding frenzy of buyers bidding up the price, speculation can cause a problem. If you look at the real estate bubble, the only thing keeping prices up in many markets was the speculator who could rush in with nothing down and get a 100% loan. Once the loans quit being written, the speculators left and we have a "mortgage meltdown".

Since the NASDAQ bubble popped in 2000, and the real estate bubble peaked in 2005, speculators with money burning a hole in their pocket gravitated to commodities -- oil in particular. They have bid up the price of oil with no idea what they are going to do with it if they ever have to sit on it. Once the price is high enough and the demand for oil has been throttled back, the speculators will be lucky to get 50 cents on the dollar for the oil they were chasing after.

[HardWorkingDem]

6. So in a nutshell....

the speculators rush in, buy the oil in hopes the price will continue to rise and hold onto it creating an artificial shortage,which also helps in the price rise? As does a sort of artificial incremental demand angle? Something like this?

[anigbrowl]

9. It's more complex than that

one of those cases of too much capital chasing too little return. As you increase the liquidity of a market, prices go up by a process similar to inflation. They're not creating artificial shortages, since investment banks have nowhere to take delivery of or store oil. What they are doing is bringing too much money to bear on trying to lock in future prices. It's about 50/50 mendacity and stupidity.

Unfortunately, the oil market is complex, as are markets and banking in general. It's satisfying but not very edifying to point at a single cause and say 'THERE lies the problem'. So what I've described above is part of the problem, but by no means the whole thing. Nor do I think it's some sort of endemic problem that means we should abandon capitalism altogether. Greed can thrive unchecked in a poorly-run capitalist system, but that's equally true in a socialist system - it just manifests itself differently.

Healthy capitalism depends on healthy markets, and healthy markets depend on transparency and low barriers to entry. One of the big problem factors right now is a terrible lack of transparency in how prices are set by the market, which leads to irrational market activity and corrupts the whole system.

[izquierdista]

10. What he said

Also, the low barriers to entry is one of the problems here. If the exchange margins were raised and the speculators had to come up with more money to hold their positions, they would get chased out of the market. That fixes the problem of too much capital chasing too little return.

[PerfectSage]

5. demand for oil futures > than supply of futures. so prices go up

There's too much money in the money supply: Fed rate too low and government defictis. That causes inflation and a decline in the value of the US dollar compared to other currencies. So speculators are hedging the rick of inflation and currency decline by buying oil, gold or silver. That excess speculative demand causes prices to go up.

If the US dollar compared to the Euro was worth what it was in 2003. oil would be about $90/barrel. Blame Bush's budget deficits over the last 8 years for any thing higher than $90/barrel..

[Fireweed247]

7. A few Major players are manipulating prices to make even more money

The elite are all working together. One government by big oil, for big oil.

[Schema Thing]

8. Think of an auction