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Oil price fluctuations February 7, 2009

Posted by mytruthaboutoil in Oil (general), Oil prices, Oil trading.
Tags: , ,

For almost a decade now, fluctuations in oil prices have totally been out of control. A barrel of West Texas Intermediate (WTI), was traded at $26.20 in September 2001. Seven years after, in September 2008, the barrel was worth $104.10, which represents an increase of 297% in 7 years.
During the same period, the difference between its maximum and minimum values is even more incredible: a 590% increase from December 2001 ($19.39) to June 2008 ($133.88).
Despite the current craziness of Financial markets, we can see that oil prices are much more unpredictable that the rest of the Market. Why such fluctuations in prices? As usual, market observers give many post explanations, but very few were ever able to predict these fluctuations.

The first and most obvious answer to oil prices fluctuations is that oil prices simply respond to market laws and economic fundamentals.
Recent oil prices explosion would simply be the result of the shrink of oil reserves and the strong growth of consumption, especially in China and India.
According to this theory, the market was simply urging us to economize oil, to look for new oil supplies, to discover alternative energies, and to improve energy efficiency.
Then, by the third semester of 2008, investors started to feel that the US and the world might enter a period of recession and that the worldwide oil demand would slower or even decrease. Therefore, prices started to fall from almost $150 to about $40.
If it appears to be a rather logical, it also seems that other parameters have strongly impacted these past years over oil prices. Some even have a fully opposed view, and claim that oil market does not respect basic laws of supply and demand.
Wall Street banks, hedge funds, mutual funds and other financial operators have recently massively rushed into oil market, causing huge impacts by itself to oil prices. Many, such as George Soros, described the speculative interest of financial operators as an “insidious development”.
Many start to ask for a regulation on oil speculation in order to limit its effects of fluctuation of prices and some say that if implemented, such a regulation would have for main effect to freeze oil price to $65-70 a barrel.
According tome, both of these theories are correct but do not fully explain these out of proportion fluctuations. First, I don’t believe one can regulate oil market. I also think that as the rest of the market, oil prices are mostly set up by speculators who invest based on their view of how prices will move.
These investors simply react to news and try to predict where prices will go. It is this latter group of quick-hit investors who dominate the market. This is basically what is written  in a June research report from Goldman Sachs, estimating that speculators account for about 42 percent of all oil trading.



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