I believe that there are clearly more investment dollars in the oil futures market (thank you, in part, Ben Bernanke).

Perhaps it is the case that there could be (insert your own percent)% speculators in the market at any given time, but based on whether they are long and/or short they may not have a corresponding effect on price - one way or the other.

On Friday Karl Denninger said this in his Frightful Friday commentary:

Now The House has come up with a bill that will "restrict" commodity speculation, never mind that a commodity speculator provides liquidity and price discovery, not price setting or forcing. This is obvious to anyone with more than two firing neurons, but it doesn't matter - the people are demanding that someone be "to blame" for high oil prices, and its not acceptable for Congress to say "well, we did that and so is The Fed, and we won't stop them", so they blame "commodity speculators."

The truth on commodity futures (e.g. oil) is simple - if I buy a futures contract that tends to force the price upward, but as expiration approaches if I do not want to take delivery of that oil I must sell that contract and buy the next month's out. In doing so I drive the price of the front month down at the same rate I drive the forward contract up - the net effect is zero. Further, you can determine the total impact of these contracts as they are unwound every month when the futures expire, and the last expiration (which just passed) we saw that the true impact is just a few dollars - under $5/bbl.

Moe Gamble said this on Friday's DB:

At this point, if the government bans speculators and pension funds from the commodity markets, the price of oil will go up sharply.

That's because speculators are now net short.

Specs short: http://www.cftc.gov/dea/futures/deanymesf.htm (Add speculators to nonreportables for total spec open interest.)

Net investment outflows from energy in second quarter: http://www.bloomberg.com/apps/news?pid=20602099&sid=ace77xJYOjNU&refer=e...

"Investors" and speculators departed longs and then got increasingly short through the second quarter as the price rose from $100 to $140.

So, it seesm that if you know where to look and how to interpret that it is realtively "easy" to determinthe level and effect on specualtion in the market.

Perhaps the what, where , and how of oil futures speculation effect could be the suject of a guest post by someone who can walk (many of) us through this?

Of course this seems to be happening downthread ;-)

Pete

1) the SPECULATORS are not really who are being blamed. Actually, the speculators, like Michael Masters who recently testified before Congress, are net short oil, and net long equities, so they want oil to go down. Its the index funds that are net long commodities. ETFs and funds linked to the GSCI or other commodity indexes.

2) Index funds are also very long wheat and gold and other commodities. Yet some of these markets have crashed from where they were a year ago - wheat dropped 50% from its highs of last year. Reason? The actual producers came in because there was plenty of wheat to supply at those high prices and for every index fund/speculator who wanted to buy wheat above $12 per bushel, an actual producer said 'here you go - I am very happy to sell you my wheat at $12". In this case reality caught up with a frothy market... If a large portion (or even a moderate portion) of oils rise is due to speculation (and index funds), the same will happen. Actual oil producers will sell the 'freely available oil' at what are 'too high of prices' and oil will do what wheat did. Hasn't happened yet.

3)By the same logic, those corporations (e.g. airlines) that are buying long term contracts to lock in prices could be swamped by actual oil companies selling them contracts if future oil availability seems adequate (based on their own internal reserve and production estimates. Thus producers will sell forward more contracts than hedgers will in the long dated months and prices will drop into backwardation. We have seen just the opposite.

4)Part of the reason we are this high is that speculators are SHORT the market, e.g each time we rally 10% there is a positive feedback loop where they have to cover their shorts and the market spurts higher again, which then encourages other deep pocketed hedge funds, who don't buy into the general peak oil concept of limited flow rates, to go short. After all, there will be plenty of ethanol and tar sands to make up for the 'possible' decline in crude. This is all changing as firms like Wood Gundy, Goldman, Barclays, etc. have started to publish very realistic research on how dire our oil situation is (though they are writing from a profit/investment perspective as opposed to a social/policy one). So once everyone has gotten oil religion and the large funds stop 'shorting' the market (e.g. no shorts left), then we will be free to drop in price. In this sense speculators ARE influencing the market, but in a very sneaky, self interested way not being discussed 'before Congress'.

5) Finally, oil margins have recently been raised to $8,500 per contract:

Consider we are at midway point of URR and there are 1 trillion barrels left, this is 150 barrels per person living on the planet (and none for any of their children or grandchildren). For $8,500 one can control 1,000 barrels of oil, 8 times ones all time allotment for posterity (assuming that each human had equal rights to oil, which clearly isn't the case). Imagine what $85,000 or $850,000 or $8.5 billion could do. As I've written about often here, there is a paradigm shift coming between abstract wealth (paper currency) and real wealth (commodities, real goods, social, natural capital, etc.) Left to their own devices the deep pocketed institutions could run oil closer to its true value, in the thousands per barrel, but OECD trade and the economic system as we know it grinds to a halt before that time.

Interesting and important times. I agree with Jerome. Lets hope our leaders are mature enough to look beyond the easy scapegoats and make some uncomfortable but necessary planning choices. Its always difficult to admit that its our own fault...