Speculators, assisted by the US Federal Reserve, have driven crude oil prices to unsustainable levels over the past year. Now, the Fed is withdrawing the liquidity that has financed this rise.
The above chart from Petromatrix shows the surge in crude oil speculation on the Chicago futures market since August. The light blue line shows it taking off from net length of 50k contracts, to reach 200k by the end of the year.
The dark green line then shows it going even higher this year, to an all-time peak of nearly 300k.
It is no surprise at all that this 6-fold increase in futures demand powered crude oil prices higher. They jumped from $75/bbl in August to $125/bbl at their peak. Every chemical purchasing manager in the world had to buy forward as far as possible, to try and preserve margins.
But now the Fed’s liquidity programme, QE2, has come to an end. Markets anticipated its arrival from August (it officially started in November). Now, since April, they have begun to anticipate a world in which supply/demand balances, not liquidity, determine prices.
How far has this move to go? One clue can be found from the fact that net length is still around 175k, compared to 50k in August. And, of course, there is nothing to stop it going negative, as it did in 2008 (light green line) and 2009 (red).
The Fed’s aim with QE2 was to boost risk assets, and drive down the value of the US$. It thought this would kick-start consumer confidence. How wrong can you be?