People who say that speculation isn’t a problem are simply deluding themselves. As of today, speculators do not have to take delivery of oil. They can control oil with a token amount as the margin - a year ago, it was 6%. The margin on stocks is 50%.
The CFTC found that 70% of the demand for oil was actually speculators - people who have no intent to actually use or even possess the oil. This is why demand is low, inventory is high, and yet prices remain sky high. Speculators can gamble on the price with very little risk. Back in 2008 when the price spiked, speculators were controlling more than 80% of the market.
Speculators do not participate in a free market. It would be a lie to say that the market is free because a true free market is dictated by supply and demand. It would be one thing if they were simply statistically gambling on the price of oil. It’s another thing entirely when they actually affect the price of the real commodity.
But why is this a bad thing? The speculators use their brains and self-interest to keep the oil supply tight if they suspect that a shortage could happen in the future. If there was something stopping them from keeping the price high, such as an artificial government price cap, then everyone would simply start hoarding oil at the low price, and we might actually see gas pumps go empty. Because those hoarders would see the same conditions the speculators see...the Middle East on the brink, a U.S. not interested in producing its own supply and a possible economic recovery. Someone setting the price based on rational, free speculation helps keep the supply available in a time of crisis. A high price is better than a price cap and gas sold out everywhere.
Isn't essentially all crude oil that is pulled out of the ground refined and consumed (other than what goes into the SPR)?
How does 6% compare to margins on other commodities?
Don’t oil ‘speculators’ have to close out their positions like other commodity ‘speculators’?
Commodity ‘speculators’ lose plenty often.
Are you saying the commodity trading rules are different for oil, and if so how?