Lately the fallacy has been spread that Libyan unrest combined with Egyptian and Tunisian uprisings have caused oil prices to spike up to over $104 per barrel as of the close of business on Friday March 4. Proponents of this theory declare that real concern exists that Saudi Arabia is also susceptible to such unrest leading to severe supply shortages in the future.
That said, there have been no substantial supply disruptions. In addition, US oil inventories remain at record levels. Further, OPEC has pledged that it will continue to meet its supply target regardless of disruptions in Libya, as Libya only represents less than two percent of the world's oil. Finally, Saudi Arabia has shown no sign of instabillity except for its proximity to the unrest, even though Southern Europe is far closer to Libya than the Middle East.
Since the last collapse in the price of oil in 2008, numerous OPEC leaders have said that $70/barrel is the requisite price for speculative oil exploration to remain profitable outside of the Middle East. This $70/barrel represents an apex in prices, where non producers find it profitable to become producers. Think of it as the wage necessary to make an engineer change professions to a carpenter. $70/barrel equals cost to remove + reasonable profit + premium to change behavior in a country that has made a decision oil drilling is not in their best interest economically.
So why are we at $104/barrel? Long positions by hedge funds and speculators has increased thirty percent since March 1, 2011. These individuals are unilaterally buying up oil contracts with the cover that the media will present the Middle East uprisings as dire. What is undesirable about these individuals behavior is that they are not end users of oil, such as refiners or power companies, they are merely adding as much money on margin as possible to exacerbate the oil increase. Why do they want to buy oil, simply to sell it to those end users at the end of the month's contract at a premium. Since the NYMEX crude oil market is relatively small in market cap compared to the NYSE or NASDAQ, relatively small amounts of money can create price changes. Also the availability of purchases on margin with little down payment reqyirements make the NYMEX an attractive place for market manipulators who desire to disrupt the purchase and sale transactions of drillers and end users.
The paramount issue is not supply, not producing countries and not the market.... it's simply American traders who want the price to move up at the expense of the entire country for their individual greed.
Three weeks ago, the market saw oil lose 3 percent in just under three hours when the CFTC and ICE raised speculators margin requirements 12 percent to purchase oil. This meant speculators had to put 6% down instead of the 5% that was previously mandated. Six Percent?????!!!!!!! Well, perhaps the inability of regulators to demand a reasonable hard money commitment is the issue in and of itself.
Aside from the common sense solutions of disallowing all participants except for end users to access auctions or the elimination of auctions all together, an effort to end price manipulation in oil markets should also include a commitment of over $6,300 to purchase $100,000 of oil contracts.