Ali’s blog

Mostly quant stuff with occasional digressions

What’s driving up the price of oil? A perspective from the other side of the pond.

Posted by alifinmath on February 29, 2008

In Der Spiegel:

“Supply and demand cannot explain the high prices,” says Fadel Gheit of Oppenheimer & Co., a leading commodities analyst. Like many in his profession, Gheit believes financial investors are driving up prices. He’s reminded of the Internet bubble around the turn of the millennium. According to Gheit, oil is also seeing “excessive speculation” at the moment.

Enormous amounts of money are currently changing hands in the business of oil contracts. With the American real estate debacle infecting ever larger segments of the capital markets, from stocks to bonds, investors are seeking alternatives worldwide. Oil, with its supposedly straightforward market rules and ever-rising prices, seems to be a perfect tool for spreading risk and maximizing profit. But many investors will have a rude awakening when they realize that an investment in oil, though it may look different, is no less a gamble than other types of investments.

The world consumes 86 million barrels of oil a day, but trading volume is 15 times as high. The difference represents bets on future price developments.

The upshot of all this trading is that speculators now hold up to 45 percent of all oil contracts — three times as many as at the turn of the millennium.

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