3-31-10 by dugan
After President Obama announced Wendnesday that he’s opening large swath of U.S. coastline to oil and gas drilling, and the government announced that domestic oil supplies had risen, the price of oil went… UP. That’s pretty much proof positive that the price of oil is all about financial speculation, and not at all about supply and demand.
Rather than reinvent the wheel, I offer an eloquent email message sent today by hedge fund founder and manager Mike Masters about this upside down market reaction:
It’s pretty ironic, that on the day that President Obama announces support for a significant expansion in oil drilling in this country (offshore), the price of crude oil futures are HIGHER on the day. In fact, the price of crude oil (futures) is up over 3 dollars in the last 3 days of trading, rising more than a dollar just today.
Don’t forget in the past that Republican partisans chanted "drill baby, drill" in mid 2008 as the solution for lower energy prices to the American consumer. Well, here we are, and despite a major announcement by the President today on the expansion of drilling, the price of crude oil is higher, not lower. This is in direct contrast to all those folks that said in 2008 that expansionary drilling announcements from the government would immediately lower oil prices.
It’s important for everyone to realize that, while more drilling may help domestic supplies over the very long term, in the meantime oil price formation is dominated by speculators. So in this case, a major announcement by the President, which could easily be viewed as leading to larger supply, is basically ignored by the market. In fact, since financial interests are now the dominant participants in oil price formation, they are primarily reacting to other issues of more importance to themselves, notably end of quarter "marking" up of positions, buying ahead of likely 2nd quarter investment flows into commodities by large investment institutions, and finally speculating based on the level of the U.S dollar vs. other currencies. So, despite the fact that future drilling may increase substantially, it is just not important enough of a factor to move the price needle given the primacy of other views held by speculators.
I hope this helps people understand the difference between the acute, financially driven nature of higher energy prices vs. systemic energy supply issues. It is critical for policy makers not to ignore the gorilla in the room, which is the clear dominance of financial interests in our crude oil and other consumable commodities markets. They must be reigned in if these markets are going to reflect true supply and demand rationale once again. Announcements of potentially more supply are one thing, but if policy makers want a truly comprehensive energy policy, the role of financial speculation can no longer be ignored.