The Next Oil Price Surge Is On Its Way

Get Ready For The Next Oil Price Surge

Date 18/08/2008

The Right Side

Garry White

Speculators like you and I are bad. Really, really bad. You should hold your head in shame.

Evil speculators drove the global economy to the brink earlier this year. They creamed off obscene profits as decent hardworking people struggled to pay their bills. Shame on them... and, if you were involved, shame on you!

This was the line relentlessly pursued by the likes of John McCain, Barack Obama, George W Bush and even the US commodity regulator the CFTC.

They are all wrong. Speculators aren’t bad; they are an essential part of an efficient market. Anyone who claims otherwise is very stupid.

As oil headed for its peak of $147 a barrel, some claimed that the removal of speculative bulls from the market would cause the oil price to fall to $50 a barrel. These claims have now been exposed as a lie.

The bears are now well and truly in charge. There are more short positions in the market than long positions.

Last week, speculative short positions on WTI contracts outnumbered long positions by 9,130 contracts. There were 192,081 long positions and 201,211 short positions. This means short contracts grew by a staggering 65% over the week.

So why isn’t oil now close to $50 a barrel? Why aren’t these speculators driving the price down?

The reason it isn’t is because all of these claims about evil speculators were a politically-motivated smokescreen. The political elite needed a scapegoat that shifted the blame away from them.

If gains in prices were driven by speculation and speculation alone, logic dictates that commodities that are not traded on any exchange would have enjoyed static prices.

This is simply not the case.

The price of steel, iron ore and cobalt has doubled over the past year... with not a speculator in sight.

It’s the fundamentals, stupid

Price gains are down to long-term demand growth and the lack of investment in finding new supplies. I believe that the amount of speculative froth is limited. It certainly doesn’t make up the majority of the price. Threats by US regulators have had an effect. Some oil bulls have decided to withdraw from the market until it is clear what action to the regulator will take. A market abhors uncertainty and that is what they have created.

I think the CFTC is unlikely to introduce any regulations to curb futures trading. They are unlikely to interfere with free markets. It is an absurd proposition. Once this is clarified, the oil bulls will once again enter the market.

This uncertainty is part of the reason that many investors have been switching from energy investments into the bombed out banking sector over the past month... but this trend may be about to be reversed.

Last week Merrill Lynch said that the "fashionable" investment tactic of buying bank stocks while selling energy companies was looking overdone. It warned on the level of toxic debt in bank balance sheets.

Of course, the main cause of the slide in the oil price from highs has been down to fundamentals.

Fears of a global recession have hit demand and the dollar has been rebounding. The US regulators can also share some blame by using the market as a scapegoat, causing participants to withdraw.

I believe that the strengthening of the dollar will be a temporary phenomenon. The country continues to swim in a sea of debt at the same time as spending billions and billions on global warfare. To steal a phrase from the greens, it’s simply unsustainable.

The global economy may be in the doldrums for a number of quarters, but it will recover. Oil is a finite resource and demand continues to grow — despite the economic slowdown. The long-term trend remains intact.

"Speculators" are essential for a market to operate efficiently. They provide the liquidity needed for producers and buyers to get a good price. They are not a force for bad, but a force for good.

Although demand conditions for many commodities may have eased, supplies are struggling to keep pace with even the slower rate of consumption. I believe this will continue.

The oil price is on the rise again today as investors fret over another supply shock. Another potential hurricane is causing disruption in the Gulf of Mexico. This is just one of many potential supply shocks that could happen this year.

I remain a long-term bull of the oil price. Demand is rising for a finite resource. This is just a temporary price fall.

At Smart Commodities UK I seek to profit from the latest trends in the oil, commodities and infrastructure sectors. Click here to discover the latest profit opportunities.

Regards,

Garry White
Editor
Smart Commodities UK.

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The Next Oil Price Surge Is On Its Way – Get Ready

Get Ready For The Next Oil Price Surge