Defending crude oil speculators

In fact, we are seeing that today as it is being reported by the Financial Times that, "OPEC is Rushing to Raise Output". The FT says that other influential members of the OPEC Cartel, like Kuwait, the United Arab Emirates and Nigeria, reflect growing unease among OPEC members over the threat to the global economic recovery from crude's runaway rise amid the worsening crisis in Libya."

So in other words, the futures price is inspiring action to their point to bring on more supply. Do you think this would be happening if prices were steady?

Mr. Kloza goes on to say, "the disruption of oil coming from Libya has been largely overblown because Libyan oil is light, sweet crude.” This means it has low sulfur content and is easily refined in unsophisticated refineries in the Mediterranean. The oil replacing it has more sulfur and has created a minor logjam. "If this stops with Libya, then all this is blown out of proportion," Kloza said.

Well yes, I agree Tom, if this all stops in Libya it is being blown out of proportion. If all this unrest blows over then oil prices will plummet. Of course that is a big "if". The changes going on across the Middle East and North Africa are of an unprecedented nature and to think that this is all going to blow over anytime soon is a dangerous bet. One of the ways that many try to prognosticate the future is to look at trends and the trends in North Africa and the Middle East are disturbing to say the least. The market tried to ignore Tunisia and it started to get nervous when the uprisings spread to Egypt, yet it cannot ignore a full blown civil war breaking out in Libya, an OPEC member. Nor can it ignore the very real possibility that this will spread to another OPEC country in the near future.

Even Mr. Kloza, according to MarketWatch, "is nothing but grim about what would happen if the government fell and the flow of Saudi oil became disrupted. ‘It is a true, absolute nightmare scenario,’ he said. ‘It's a complete abstraction to say what the price of fuel would be. It's a silly intellectual exercise to even speculate. But I'd have to guess somewhere between $5 and $10 a gallon.’”

Well thank goodness we don't have to get involved in a silly intellectual exercise to speculate what the price might be because we have the market to do that for us. A free market with hedgers and speculators and enhanced liquidity provided by those wonderful, high frequency traders doing the job the market makers and the scalpers used to do, will do a better job predicting the real risk and real price than me or anyone else.

It becomes a dangerous proposition to try and predict the future, especially when you get caught up into believing that you know better than the market what the price of oil should be. Users of the product get caught up in this game all the time in what is termed 'the fallacy of fair price". If you zero in to a world that you have become accustomed to, you sometimes miss the outside forces that impact price. If you try to convince yourself that you know better than the market what the price should be, you will look for scapegoats and blame speculators or blame computers. This is a common occurrence when prices don't go your way.

<< Page 2 of 3 >>
comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome