The recent run up in oil and gas prices has politicians and some misguided analysts blaming speculators for the higher price. Well, the truth is that speculators, by their active participation in the marketplace, actually kept prices lower. Despite the surge in hedge fund participation last week, oil prices seemed to have topped out short-term, and we saw the price pull back. You see, the reason oil prices did not go to $120 a barrel and gas to $4.00 a gallon is that speculators assumed the greatest risk to global oil supply since the absence of that sweet Libyan crude. We have had Europe embargo Iranian oil, and then Iran embargo them back. We have worried countries in Europe and Asia scrambling for real barrels of oil and hoarding it in case they get cut off if there is a war. The only thing that may slow that process is the higher price. The higher price starts to ration supply so that indeed if there is a cutoff in supply, there will be enough oil to go around. If prices stayed low then someone might try to buy a big chunk of supply and hold it off the market. This in turn could create shortages and tensions between the haves and have-nots.
You see, if you can read a chart, many times you can tell what the market is thinking. It was clear that if the risk of war increased in Iran, then oil could hit somewhere near $110. We saw that risk go up when talks with the International Atomic Energy Agency failed and reports that Iran has tripled its uranium enrichment program were released. Now that we have hit that level, prices have eased off. If there were no speculators to assume that risk, the consequences might have been dire. What is panic buying of real supply and real barrels could turn into a stampede of hoarding and removing supply from the marketplace.
Not only is that because of speculators, but it also makes the oil price discovery better than it has ever been. The introduction of high frequency traders has given the floor quick and accurate executions of orders. No more waiting for minutes or hours to find out exactly where you stand in the marketplace.
It seems some pipelines are more politically correct than others. Yesterday, we heard that TransCanada Corp. will expedite the Cushing, Okla. supply to the refineries in the U.S. Gulf Coast part of the Keystone XL oil pipeline. The White House applauded the measure because for once the pipeline does not cross the border and the administration had no responsibility for the pipeline, and at the same time it can claim it voted against the pipeline before it voted against it. Of course, we all know that the pipeline will get built, so if you are a die-hard environmentalist, you should feel a bit used.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.