Oil Speculators

In a March statement during a Senate hearing, the head of the Energy Information Administration said that market speculation has added as much as ten percent to the per barrel price of oil. The Energy Department official went on to say that according to EIA calculations, the current price of oil should be about $90 per barrel based on current supply and demand.

Another recent report on CNBC stated that the pool of money invested in the oil market and its derivatives has expanded by a factor of 6 times over the past several years, which further supports the increasing sentiment that the current price of oil is not reflecting actual supply and demand. While the equity markets have been in decline over recent months, the big money has been moving to commodities, which has accelerated the price increases in oil and gold markets among others.

As the Federal Reserve reaches the end of their interest rate cuts and the value of the dollar begins to strengthen against the world’s currencies, it is very likely that the commodity markets will begin to fall from their peak prices. This trend is already apparent as gold has retreated to $855 from a peak of $1030, and oil finished today at $111.82 after a recent peak just under $120. The $90 price for oil might not sound cheap, but that would be a 25% decline from the market top. So don’t run out and sell the SUV just yet. A little patience might be in order as the financial markets shake out the oil speculators over the next few months.