I'll repost what I wrote in another thread.
A few things:
As you can see, the price of oil seems to follow the astronomical gains the NASDAQ experienced during the tech bubble. A new bubble?
The price climb in oil is probably due to a mix of speculative fervor and real supply and demand concerns. It surely can't be attributed to all
speculation, as someone is taking physical delivery of oil at these prices.
On the other hand, that chart does show an interesting pattern that probably amounts to a bubble in prices. With Goldman Sachs and other investment
banks coming out with predictions of $200/barrel prices almost daily, perhaps they are trying to find an exit for their long positions. Only now are
we seeing pension funds, average investors, and others starting to pile into the oil trade.
The cheap money being lent to large banks by various FED concoctions such as the expanded TAF (which the FED takes crap credit and mortgage debt as
collateral) is seeking returns and the greatest returns in the current market climate are in commodities, thus driving prices up as more and more cash
is parked there. Traditional flights to quality (to equities, treasuries and commercial property) have all proven too risky for the large market
players to invest heavily in, adding another reason to the appeal of commodities.
This is a reason for increasing demand. The chart shows how heavily gas and diesel prices are subsidized in China. I'm sure some have heard of the
explosion of demand in foreign nations, this is part of the reason why. Low prices for them means artificially stimulating worldwide demand, once
again driving prices higher. An argument for a pure supply/demand price increase might go like this:
Suppose you are a pig farmer on an island with 10 pigs. There are 10 families on the island, so assuming each family wants 1 pig, the price will
remain stable at let's say, 10 dollars apiece. Another family moves onto the island, bringing the total to 11 families. Once again, assuming they
want a pig as well, and there being only 10 pigs, they offer 12 dollars for a pig. The most probable outcome is the bidding for each pig will get
successively higher until a family is priced out. Note that the increase in price is not 1:1 with the increase in demand. This explains why we have
seen a huge increase in oil prices, but not an increase in demand that quite matches the price surge.
I've read numerous sources calling a top on oil, but that is left to be seen. One thing is for sure, demand destruction is sure to follow at least
here in the United States in the wake of this credit crunch/housing crisis. Taiwan, Malaysia and Indonesia are all cutting their fuel subsidies down
in the wake of rising prices, which should dampen demand a bit further (Source) . Rumors abound whether or not China will, with most thinking if it
were to happen; it would be after the Olympics.
As far as making a difference in price right now, it's unlikely as investors are starting to look into future oil supplies (read: peak oil) and
pricing both futures and spot prices higher.
Once again, if it is all speculation, why and who is taking physical delivery at these prices? Why don't the buyers simply short the hell out of the
ES if its all speculation?