More on a Potential Oil Bubble

,
In a Financial Times op-ed, Meghnad Desai aruges that there is, in fact, a speculative oil bubble:
The point is that this paper market is not driven by the pressures on demand and supply but entirely by price expectations. An underlying situation – which may well indicate a medium-run rise in oil price – is being exacerbated by the bolstering of expectations that prices will rise even faster. It is this extra layer of price rise that is driving money into even the farther future contracts. There are futures contracts being bought and sold for 2016 at $138 – only astrologers pretend that they can forecast that far ahead.
To pop the bubble, Lord Desai proposes charging "purely financial traders" a higher margin than "regular traders," by increasing (significantly) the margin required to trade as open interest.

I'm still of the opinion that speculation is playing a role in oil prices, though no more of a role than the increasing demand from China/India and the stagnant supply of oil. I keep wondering whether the reason arbitrage hasn't forced futures prices back down yet is that a lot of arbitrageurs think the futures price will go even higher before peaking, and are therefore waiting until they can reap the most profits from arbitrage. If enough traders who would be going short are sitting out with the expectation that futures prices will be even higher later, then the number of purely financial traders would quickly overwhelm the regular commodities traders, pushing the price higher still. That could be a stupid thought, though.

0 comments to “More on a Potential Oil Bubble”

Post a comment

Pages (38)1234 Next

Popular entries

  • Kool-Aid at Toll Brothers... Economics reading: On December 5th Toll Brothers reported 4th Quarter Earnings and the results were not exactly...
  • Maxed Out... Economics reading: Are we about to see a trend reversal in reality television shows from the likes of Flip This House...
  • A Lit Fuse in Key West... Economics reading: I have a new set of posts from a friend living (and renting) in Key West who posts on my board on...
  • World Trade Progress... Economics reading: Reuters is reporting Brown, Paulson call for WTO progress.I must note that Mish has been calling...
  • An email from Bernanke... Economics reading: I was quite surprised to wake up this morning and find an Email from Ben Bernanke sitting in my...
 

Economics reading © 2011 - More on a Potential Oil Bubble