The Oil Drum

Speculators don't care whether oil prices go up or down. They can make money going both ways. In fact, they would make the most money by driving it up, and then driving it down. That way they could make money on the way up and then again on the way down.

The key thing to remember about speculators is that they don't buy oil. They buy oil futures. The last thing any speculator wants is to be the proud owner of 1,000 barrels of oil sitting in a tank in Cushing, OK. Somebody has to be willing to buy the actual oil at the actual price. If a speculator pays $120 for oil, and real consumers are only willing to pay $90, the speculator is going to lose a lot of money. This puts a limit on the effect speculators can have. In effect, their contracts get "marked to market" on expiration day. In addition, the "commercial interests" (i.e. non-speculators) dwarf the speculative interests in the number of outstanding oil futures contracts, further limiting the speculative effect.

Prices are ultimately set by supply & demand. Speculators have a limited effect on supply & demand, and what effect they have is opposite to the direction of their speculation (e.g. pushing prices down will tend to increase demand & reduce supply, which limits the downward movement of prices). If speculators could just push up prices at will, the Hunt brothers wouldn't have tried to corner the market in silver back in the 70s, they just would have "speculated" it up. They didn't, because cornering the market directly affects supply, which directly affects price. Speculation doesn't.

Speculation actually serves a number of useful purposes. Besides providing liquidity for commodities markets, it also helps contribute to a sort of cumulative wisdom effect. Everyone, both producers and consumers, needs to know what the future price of a commodity will be.

When a speculator thinks the current price is low relative to where it will be in the future, he goes long (e.g. he speculates that the price is going up). When he thinks the price is too high, he goes short. Each speculator makes that judgement himself, and the cumulative ratio of longs to shorts represents the cumulative wisdom of speculators.

The net effect of the speculation is to push in the direction they are already headed, but to get them there sooner rather than later. This sends an earlier price signal to both producers and consumers and allows them to plan accordingly. This early price signal helps prevent future supply problems. Of course, if the cumulative wisdom is wrong, the majority of speculators are going to get crushed.

Right now, anyone who is not drinking the government/MSM Cool-Aide knows oil prices are too low and should be "speculating" that they are going up. If enough people did this, it would signal to the world that we have a future supply problem, and that would perhaps force us to address it before it was too late. Speculators are a convenient scapegoat for people who don't believe in supply & demand or who are in denial about peak oil.

Moe Gamble wrote on tnis topic if speculators influence on price of oil...http://www.theoildrum.com/node/3909#comment-335695

Bottomline or conclusion was:

there is no correlation between numbers of speculator contracts or speculator "herding" or net spec longs and commodity prices