It usually takes me a while to catch on, but I think I am finally getting it. Oil prices are being manipulated and driven higher by speculators in the futures market.
Crude prices seem to jump over any event whether large or small. In fact, gasoline prices are fluctuating so wildly on a daily basis that many gas retailers are buying matrix price signs to avoid climb a ladder to change prices everyday.
There are many things that can affect the price of oil, we are all aware of issues such as supply and demand, and the events that cause supply disruptions as well as small amounts of excess capacity.
The issue not being discussed is what is actually causing excess capacity to be so small. As I begun to take a look at the futures market, it hit me all at once.
The low oil inventories are actually deceiving. It is not that we have an immediate crisis of low inventories because of consumption, it is actually due to "oil hoarding" due to distant futures prices being more expensive than the current spot price of oil.
If take a look at the closing prices of these crude oil contracts (Sep 06, Oct 06, Nov 06, Dec 06) on barchart.com you will see that each distant futures price is progressively more expensive than the current months price.
Sep 06 $76.35/bbl
Oct 06 $77.53/bbl
Nov 06 $78.24/bbl
Dec 06 $78.66/bbl
What seems to be happening is excess cash from around the world is attracting buyers, and encouraging speculators with storage capacity into increase their inventories. So, even with the world oil production gushing, the increased production of excess crude is being snapped up and hoarded.
Oddly, inventories and oil prices are increasing in lock step as speculators hoard more and more excess inventory. These speculators seem to be betting (and successfully so far) they can sell their inventory hoards at the forward futures prices and lock in huge profits.
Sooner or later this speculation will play itself out, and this will lead to a sharp decline in the price of crude. I have no way of knowing how or when this will happen, but as the majority of investors look at energy as a sure bet, maximum pain will surely find the majority.
If the government would begin to investigate the current activity taking place in oil futures, we may begin to see a major correction in the price of crude.
For now it seems that the government is content with allowing their friends to have a little fun at the consumerç—´ expense.
