A little on prices and speculation

There’s an interesting piece on the effects of speculation on prices in the oil and corn markets in the US over on Donklephant, which is talking about Obama’s Plan to Address Energy Trading. It is all right blaming the speculators in both markets, but if you take a position in a commodity then you have to be able to close it out or you lose your shirt (cuff-links, waistcoat, trousers and handmade shoes).

is the recent oil spike a bubble? Please tell me what you think.

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3 Responses to A little on prices and speculation

  1. Dick Bonnet 23 June, 2008 at 7:20 pm #

    The commodities markets serve a purpose and the traders make or lose money based on their positions relative to the market. With the turmoil in Nigeria, Venezuela, Iraq, Iran, Russia and China it is no wonder that the traders are following closely. I heard today that there is more oil shut in in Nigeria than Saudia Arabia could increase production. Until the world supply equals world demand there will continue to be the peaks and valleys and the speculators and the traders no matter what Obama does. If the speculators on margin get forced out then there will be speculatos with cash right behind them. If someone can play the volatility they will.

  2. David B. Benson 23 June, 2008 at 11:53 pm #

    George Soros says that oil, along with all the other commodities, are in a ‘protracted bubble’.

    Whatever that means.

    However, the crude oil futures market is in a rare conditiion called a contango(?) which implies that for the life of all the futures, the traders expect the prices to rise. The demand for transportation fuels is highly inelastic, so barring a world-wide depression, on those grounds prices will rise. Finally, most crude oil is traded in US dollars; the dollar continues to be ever further inflated; so on those grounds prices will rise.

    All this sounds good for biofuels made from other than foodstuffs.

  3. Simon Robinson 24 June, 2008 at 9:21 am #

    It takes two to contango, but its too late to teach you to dance… sorry couldn’t resist that. I’ve been talking to our ICIS pricing people and you are right. When a market is in contango, it means that the price of the product in the future is higher than it is now. Most of the time markets are in backwardation, it is more expensive to buy now than in the future, because usually the future price is lower because there is a risk that the product will be delivered.
    As my pal Paul Hodges points out in his post Israel’s training exercise worries oil markets (http://www.icis.com/blogs/chemicals-and-the-economy/2008/06/israels-training-exercise-worr.html), the issues behind this rise are not simply supply and demand but the threat to longer term disruption, as people with interests in the Middle East continue to put pressure on Iran to stop its nuclear programme. Lets hope there’s a diplomatic answer and quickly as Paul says.

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