The time has come to return to fundamentals. There is understandable perplexity as to why the price of crude oil has jumped from around $80 per barrel in February this year to close to $140 per barrel today.  Demand has certainly not shot up and there have been no significant interruptions in supply.  Speculation by the paper traders on Wall Street seems to be one explanation.  The volume of oil futures contracted on the New York Mercantile exchange (NYMEX) has increased significantly and the Commodity Futures Trading Commission (CFTC) has estimated that 68 percent of the NYMEX oil futures contracts are now held by speculators — up from 57 percent three years ago. 

However, the question to which there is still no unambiguous answer is whether speculators alone are driving up the price or whether their actions reinforce an underlying trend.  The CFTC has done an analysis of the factors behind the surge beyond $120/b. Their early conclusions are that the commercial participants (i.e. companies that physically produce or use oil like the oil companies, airlines and the power utilities) are the first to respond to new market information and the non-commercial participants have only consequently adjusted their futures position.  Two other studies have also suggested that there is no “oil bubble” like with tech stocks and real estate, and that speculators are not alone in driving the price of oil beyond its fundamental value.  UBS surveyed 1048 equity analysts and strategists.  56 per cent of the respondents said there was no bubble.  A second poll of 324 energy investors saw 67 per cent vote for “no bubble”.  The voting pattern does reveal, of course, that a significant number believe otherwise, so it would be wrong to conclude that speculators are not responsible. It is clear that people simply do not know why prices are so volatile.

... contd.