November 16, 2008
Oil Trading with a 5 Handle…
By Wade Rousse
Are oil speculators now the good guys? It seems like only yesterday the price of oil was north of $140 a barrel and many people were blaming oil traders for these sky-rocketing prices. So now that oil is trading in the mid-$50 range (the trader term for this is a “5 handle,” thus my headline), shouldn’t all of those who blamed the oil traders for high prices now be giving them credit for these lower ones?
Are they no longer greedy capitalists but now benevolent philanthropists? During these harsh economic times, have they decided to lower the cost of living for families around the world by reducing the price of oil? Of course not! Obviously, I’m just being facetious.
As I wrote in a previous post, traders simply evaluate supply-and-demand conditions. They take “future” positions, with the intent of making a profit. This speculation results in liquidity and price discovery and benefits the market by allowing investors to manage their risk.
Just as speculators were not the villains when oil prices were rising, they are not the saviors as they fall. They are simply market makers, and some of you may be surprised to learn that many are very nice, family-oriented people.
World oil supply is very inelastic. Therefore, as global demand fell during this economic slow-down, prices fell dramatically. This is very logical. But here’s the key question: If world oil supply does not magically become more elastic, and if alternate sources of energy are not brought to the marketplace, what will happen to oil prices when this decrease in global demand reverses?
Posted by Wade at November 16, 2008 9:17 PM
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I guess that with the increase in alternate fuel sources, the price of oil would go down even more to stimulate consumers. This is only my guess.
Posted by: Cherie N. Russ-Chester at November 17, 2008 7:06 PM
"what will happen to oil prices when this decrease in global demand reverses?"
I don't see global demand increasing anytime soon due to the continued strain in credit and financial markets. However, when global demand does recover (maybe not this summer, but next summer) we could see a potential bubble in oil, and a broad range of commodities, that leads to much greater elevation of prices than this summer. This would be consistent with past summer-peak and winter-trough oscillations of west texas intermediate prices that have grown much stronger.
Thus, investment into alternate sources of energy is critical in advance of such a situation.
Posted by: Anonymous at November 18, 2008 10:07 AM
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