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Unformatted text preview: O I L T rading: The increasing interaction between oil and financial markets is pushing
oil to become more of a financial asset, disconnecting prices from the
m arket fundamentals of supply and demand, allowing non-commercial
t raders to drive prices in search of gain. A clear example of how oil
p rices are becoming more vulnerable to non-market fundamentals is the
u nprecedented jump that was reported on the 22nd of September when
t he price of WTI surged more than 25 dollar during int ra-day t rading.
The compounded impacts of speculative t rading and investment funds of
f inancial institutions moving in and out of the oil futures is artificially
moving oil prices, and leading decision makers in exporting as well as in
i mporting count ries to dismiss real price signals.
One particularly alarming aspect of the new speculative demand
however is that i t actually increases when prices increase. Therefore,
r ising prices create more demand from futures speculators, opposite to
w hat would be expected from price-sensitive consumer behavior.
Despite reaching record figures in nominal terms, the oil price is still
lower than historical peaks in terms of real dollars. I believe that the
u pward t rend in prices is not due to lack of supply in the oil market.
T hey are being primarily driven by factors that aren’t part of the supply
a nd demand equation. They are caused by elements such as unreliable
i nformation about supply and demand which adds uncertainty to oil
m arkets, by lack of spare production capabilit ies in the existing
r efineries around the word, by speculators hoping to benefit from the
volatility in world energy markets, and of course by the political unrest
i n I raq and other producing count ries. Thus it’s fair to say that
r estraining price volatility is beyond the producers’ abilities and control. ...
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- Spring '11
- Supply And Demand