JP Morgan released a provocative study that analyzed oil price movements over the last few years and found that over 90% of the variation was caused by inventory or supply changes. These supply and demand shocks dominated any activity by speculators. Of course, this begs the question of whether the people who have inventory speculate on prices. In fact, the CFTC released trader information which showed that the net positions of financial firms was actually decreasing during the run-up in prices during 2008. It is possible that smart money actually did not believe that prices would reach such high levels.
Most important, this study suggests that the market for oil is more complex than what we believe. Rising prices does no imply that speculators are causing the run-up. You could answer that there is no complexity when price responds to supply and demand shocks, but the difficulties arise from the sensitivity of price to changes in fundamentals. Given the strong need for oil across so many businesses, any change in inventory may translate into a price move that is more exaggerated. The action is in the elasticities of demand and supply which are much different than other markets. The tightness n oil markets can lead to strong price responses when there is an inventory shortage.
Now there will be some that argue that having JP Morgan conclude that speculators do not drive the market is like having the fox guard the hen house, but the burden is now on the CFTC to show what is the the transmission mechanism between speculation and price movement. I look forward to seeing that study.
Most important, this study suggests that the market for oil is more complex than what we believe. Rising prices does no imply that speculators are causing the run-up. You could answer that there is no complexity when price responds to supply and demand shocks, but the difficulties arise from the sensitivity of price to changes in fundamentals. Given the strong need for oil across so many businesses, any change in inventory may translate into a price move that is more exaggerated. The action is in the elasticities of demand and supply which are much different than other markets. The tightness n oil markets can lead to strong price responses when there is an inventory shortage.
Now there will be some that argue that having JP Morgan conclude that speculators do not drive the market is like having the fox guard the hen house, but the burden is now on the CFTC to show what is the the transmission mechanism between speculation and price movement. I look forward to seeing that study.
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