05-08-09 by dugan
I don’t know why CNBC has suddenly gotten honest about what’s driving oil prices. Maybe Jon Stewart’s skewering of the network for its clueless economic cheerleading before the meltdown? In any case, correspondent Sharon Epperson, standing on the trading floor, said straight out today that only financial speculation could be driving up the price of oil, since there’s no increase in demand and none likely soon. Video here, text below.
Why is oil trading near a 6-month high-breaking into a new range-and rallying above $56 a barrel, when oil supplies are at the highest level we’ve seen since 1990 and demand is tanking?
Oil remains technically strong today, despite rather bearish fundamentals, as traders continue to follow the equities market. Crude’s broken into a new range and a settlement above $55 is significant.
What’s fueling the momentum? Nymex traders tell me they’re seeing new money coming in from passive funds that are reallocating assets away from precious metals and into energy holdings. It’s this money flow-rather than the fundamental supply/demand data-that’s driving oil prices higher.
That’s right, oil prices are responding to speculative cash, not supply and demand. Compare that to the auto business. Car prices don’t rise until demand rises and inventory falls. A blip in the stock market or a slight recovery in home sales doesn’t drive auto prices.
If this kind of mini-surge in oil can happen at the depths of recession, what can we expect as the economy starts to recover, and demand actually does rise? Yet Congress continues to waffle about putting tougher rules on these purely speculative trades, because the financial giants that killed the economy last year don’t like rules.