Role of speculators in oil price movement

Although I imagine that there are still people who really believe (or pretend to believe) that actual supply and demand determine oil prices, it is refreshing to read when the media brings out the truth about the role of speculators. Today, from MarketWatch, we read at article entitled "Speculators returned to oil market, driving prices" that tells us:

Speculators increased their bets on rising oil prices last week for the first time in four, helping push crude prices to a new high of $112.21 a barrel, recent data from the U.S. futures regulator show.

Long positions from speculators, or bets that crude-oil contracts will rise, outnumbered short positions by 64,699 contracts in the week of April 8, or nearly 40% higher than the previous week, according to the latest report from the U.S. Commodity Futures Trading Commission.

The surge in net long positions in crude trading on the New York Mercantile Exchange, the first since the week of March 11, helped lift oil futures to a new high on April 9. Financial investors had been cutting their long positions in previous weeks, moves that coincided with a drop in oil prices.

 

It's impossible to determine exactly how big a role speculators, as opposed to producers and physical users of oil, are playing in driving crude to record highs. Still, analysts, traders and oil producers give financial investors a lot of credit for the recent spike.

 

These buyers had fled the market last month, and their return could put further pressure on oil in future weeks. Last week's net long positions were still less than half of the historical high of 140,044 hit in the week of Jan. 8.

And this article only tells part of the picture. Hedge funds and financial institutions and others have been taking physical delivery as futures mature, so that they can continue to speculate on upwards price movement but no longer are counted as a long futures position.

-- Jack Krupansky