This is my commentary on an article on Marketwatch.com today:
This run-up in prices today is the risk premium due to threat of DISRUPTION of the SUPPLY without any compensating DECREASE in DEMAND! This is still proof that it is supply and demand that is driving the market. Sorry to disappoint you. Fortunately, the "buy the rumor, sell the fact" will probably come into play once the Israeli threat to Iran passes. Then, perhaps prices will come back down somewhat.
Speculators in the market represent only 20-25% of futures trades, according to CFTC data. Furthermore, at any given time, speculative traders are evenly divided between longs and shorts. To suggest that only 10-12% of the market participants have that much control is neither realistic nor factual.
So Who IS driving this rampage today?
Commercials, who take physical delivery, represent 75-80% of NYMEX trades. They take physical delivery. These are the ONLY true long-only participants in the market. Thus, they have greatest influence on prices. They are also the market participants who represent OUR demand for oil as they hedge to obtain guaranteed prices (hence the contract) in an environment of a potentially catastrophic risk to supply. In other words, they are US!
Even large speculative funds MUST eventually sell the market in order to avoid taking physical delivery. They HAVE to; they have no choice. Thus, every long trade requires an off-setting short trade. Again, they have no choice. They MUST short the market. If speculative funds were the driving force behind higher prices, then prices would plummet near expiration as the specs ran for the exits to avoid delivery requirements at contract expiration. This is proof that the specs don't drive prices higher, despite our desire to be tantalized into blaming an easy target. If anything, their influence is a moderating one that would drive prices DOWN. In fact, CFTC data in the past few days has shown that this was a short-covering rally, as speculative shorts were forced to buy to off-set their short trades. We must keep in mind that it was these speculative shorts who drove prices DOWN over the past two weeks. If they hadn't shorted the market over the past few weeks, prices would have continued going higher and higher! We probably would have already hit $150/barrel for oil. We should be thanking them, not cursing them!
The only market participants that can avoid this off-setting short trade are the "commercials", who buy to take physical delivery. Only they can take a long position and NEVER off-set it with a short trade. This has an influence that forces prices inevitably higher.
By limiting participation of speculative traders in the futures markets, we would be literally fueling the very fires that we seek to quell. This is because we would limit the anti-long (short) influence of speculative traders. We would also limit the market to participants who are the ONLY ones who can ALWAYS be long -- the commercials. This would empower the LONG-ONLY commercials, consolidating even greater control in the hands of the very big, and very few commercials. Thus, prices would HAVE to go higher.
The only TRUE solution, of course, is to increase domestic supply of our energy needs so that risks to disruption of global demand don't impact the supply, and thus, the price of oil. Unfortunately, I see little political will to deal with this in Washington. It is just too easy to point fingers of blame elsewhere.
We need to be careful what we wish for. We'll be much worse off if we get it!