From what I know it seems like rampant speculation really could significantly impact oil prices. I’ll put it in laymen’s terms:
The way I understand it, the original basic point behind an oil future (or forward contract) is to provide a means for which a company can hedge or mitigate risk of rising supply prices.
For example: ABC Auto Supply wants to buy oil and the price today is $100/barrel. ABC knows they will need oil this month & next month. ABC is afraid the price will go up to $150 next month, so they buy a future contract to buy half of the oil they will need next month for $125. If the price actually does go to $150 next month, ABC will not incur an increase of $50/barrel. Because of this hedge, they only incur $25/barrel increase.
Two points.
The scenario in which future price of a commodity is considerably higher than spot is called “contango”. Contango creates an opportunity to profit. You buy the commodity at spot, sell a future, store it, then deliver the commodity to the customer one or two months down the road. Your profit is equal to the difference between future and spot prices, less cost to store. Any contango situation will be rapidly corrected by the market because there are people always watching; if they see an opportunity to profit by buying a couple of futures and then renting a tanker to keep 100,000 barrels of oil for a month, they will do it. Inventory-building will go on until there’s no more profit to be made; either because spot and all futures prices equalize, or because the world runs out of cheap ways to store commodity and storage costs run too high.
There’s no evidence of contango in oil. Most of the time, spot prices lead the increases ahead of future prices. There’s also no evidence that anyone actively stores massive and increasing amounts of oil anywhere.
The second point is that oil demand curve is steep but not vertical. If speculators succeed in raising the price by 100%, demand will inevitably drop. With no changes at the supply end, you’ll discover that there is excess supply that has to go somewhere, maybe soaked up by investors with big oil storage capacities.
Oh, but you can say “hey, maybe that excess supply is still in the ground”? Maybe oil producing nations are holding back some of the oil for some reason. But then there’s no reason to blame futures speculators. OPEC could bring oil to $140 entirely on it’s own, by cutting production, or simply by not scaling up production as fast as needed by the global economy.
