Friday, June 06, 2008

Oil and commodity prices: speculators may cause a bubble, but basic demand push remains

Okay, here we go again. For the first time, I actually paid over $4 per gallon Monday. We’ve ranted about supply and demand and tapping out. But today (June 6), David Cho offers a front page story in the Washington Post “Investors’ Growing Appetite for Oil Evades Market Limits; trading loophole for Wall Street speculators is driving up prices, critics say,” link here. Hedge funds and investment banks are purchasing huge commodities contracts, not to take delivery (the ultimate pig pork belly problem) but simply to flip. George Soros (often a Democratic Party economic strategist and advocate of an “open society” in his books, such as “The Crisis of Global Capitalism: Open Society Endangered” (1999)), now tells Congress that commodities may be hitting a bubble, just like real estate.

One problem seems to be that the Commodities Futures Trading Corporation (CFTC) has relaxed rules for some investors that ordinarily prevent speculative buying. It’s been accepted that airlines and trucking companies buy futures to lock in fuel price, but they take delivery.

Soros could be right, there could be a bubble that could temporarily deflate oil prices by 20% or so later this year (and probably XOM shares) if the boil gets lanced. But the demand push for petroleum is so strong from developing and highly populated countries like China and India that the tapping out problem seems inevitable, let alone global warming. That's why we need innovations like the mass-produced plug-in hybrid, fuel from sawgrass (not "King Corn") and airline fuel mass produced from coal.

Another major reason for the runnup in commodity and oil prices is the lower value of the dollar. A major speech in Europe this week drove the dollar down further and drove up oil prices suddenly this morning. This idea was echoed by a Market Watch headline by Myra P. Seafong today, "Crude futures hit fresh record atop $135 in electronic trade," link here.

The other thing that strikes me, when seeing this story, is that investment banking is reportedly one of the areas where employers have become sensitive about the personal web activity of traders, because of the possibility of leaks of secret information, as I mentioned in a review on my books blog yesterday.

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