The Oil Drum | Predicting Future Oil Prices

91 comments on Predicting Future Oil Prices

Comments can no longer be added to this story.

| Show without comments | PDF version

dgoddard on March 6, 2006 - 3:05am

In commodity markets such as gold and silver, speculators impact pricing by changing the available supply of the commodity. When Joe Goldbug buys Gold Eagles and buries them in his back yard, there's less gold available in the market.

But oil speculators -- at least those in the futures markets -- don't take delivery of oil.

Speculators clearly impact forward contract prices, and we have seen their significant impact over the last years in the reduction in oil futures backwardation: where six year forward contracts traded at a 30% discount to spot prices in 2004, they now trade at no discount.

But since speculators always sell before taking delivery of current month contracts, they don't compete with parties that take delivery of oil. For example, if speculators raised prices on near-term oil contracts, delivery-taking buyers could wait for the price decline that would occur just before the contracts matured, as speculators exchanged out of their contracts for farther-forward contracts.

Is my understanding flawed? If not, how can futures market oil speculators impact prices any more than betting on a horse race affects its outcome?

Comments can no longer be added to this story.

tommy on March 6, 2006 - 5:16am

I am not an ecomomist, but if your logic is correct than prices would need to drop considarably at the end of each month, because speculators sell their contracts. This doesn't happen so I think it doesn't work like this.

Some how the money that speculators bring to the market has to result in increasing inventories, otherwise money would disapear. I think inventories are growing is because more money is flowing towards oil futures.

Comments can no longer be added to this story.

91 comments on Predicting Future Oil Prices

Comments can no longer be added to this story.

| Show without comments | PDF version

Search The Oil Drum with Google

Support The Oil Drum

Click the button to learn about supporting The Oil Drum with a secure donation.

Peak Oil Primers

Beware email scams!

Beware email scams claiming to be from this site. We do not have any job openings. If anyone contacts you about a job at The Oil Drum, do not reply to them, and definitely do not give them any personal information or send them money. Read more here.

“This order [i.e. capitalism] is now bound to the technical and economic conditions of machine production which today determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with the economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt.”

—Max Weber, 1905