If Speculators Were Driving Crude Higher, This Wouldn't Be Happening

Today's spike in crude oil isn't driven by speculators. It is largely driven by geopolitical concerns and violence in Nigeria. However, those who claim that speculators are driving commodity prices higher don't have the facts or the data on their side. They are just claims. Just their opinion, nothing more.

This chart is proof. Tomorrow, the July '08 crude oil contract expires, and speculators, in order to avoid taking physical delivery of 42,000 gallons per contract of crude oil, must liquidate their positions. They have to. They have no choice. They must sell either today or before the end of the day tomorrow.

This presents a very big problem for those who make such claims. Why? Because if speculators are driving the price of oil higher, then between today and tomorrow, they must off-set their long trade with a short one. Again, they have no choice. With so many speculative traders selling and running for the exits at once, all those sold contracts should drive down the price very sharply. Instead, prices are rising much higher still.

This suggests that some very forceful and large buyers are stepping into the market to buy for the purpose of taking physical delivery of that crude oil. It would be foolish for speculators, especially a large fund, to buy just one day before they would have to take physical delivery.

Only hedgers and commercials would buy in the closing hours of the contract, because they must take delivery at the end of the day tomorrow. And these market participants, by definition, are not speculators. This rapid rise of prices near contract expiration is proof that it is not speculators that are driving the price of crude oil.