What Role Are Speculators Playing It The Ups & Downs Of Oil Prices

US crude oil inventory reported lower than expected on Wednesday but did little to stop the decline in prices. WTI is trading at 48.22 down close to 30 cents after the data release while Brent oil is down a ½ a buck at 49.31. It seems once again that the large speculators have pulled off a profitable pump and dump seeing prices to new highs only to sell off as prices returned to their lower levels. Some argue that financial speculation plays a role larger than supply and demand fundamentals in driving oil price volatility. What do we know about the influence of derivatives trading on oil price volatility?

Past research has often cited a lack of inventory buildups as evidence that financial activity was not having a large impact on oil prices. Should the sustained buildup of inventories over the last eighteen months cause us to revisit any of those conclusions? Has financial reform changed the impact of financial activity on oil price volatility? If so, is the impact permanent or will it evolve further as nonbank entities take on roles once performed by banks?

Sharp, rapid swings in the price of oil can have outsize effects on companies, economies, and global geopolitics. Oil price spikes can stunt economic growth, for example, and a sudden price plunge can wreak havoc on cash-strapped oil companies. For countries, an oil price roller coaster can blow a hole in government budgets, prompt wholesale economic reform, or alter geopolitical priorities seemingly overnight.

The drive towards balancing the market hinges on rising demand growth and the reduced supply from non-OPEC producers not least in the North America, said Ole Hansen, head of commodity strategy at Saxo Bank, speaking to Trend June 6.

OPEC produced an estimated 33.2 million barrels per day during April, some 1.7 million more than last year, he said.

“The 169th meeting of OPEC came and went without the usual disagreements that we have grown used to,” added Hansen. “Talks prior to the meeting of a new production ceiling being introduced failed to materialize. But with the market already well on the way to balance, the need for new initiatives at this meeting was unnecessary.”

“Instead we saw the new Saudi Energy Minister Khalid al-Falih embark on a highly successful public relations exercise,” he said. “This helped to win over several under pressure producers looking for new initiatives to boost the price even further. With the re-balancing process well underway, courtesy of mostly involuntary supply disruptions and slowing production from high cost producers outside OPEC, this was not the time to rock the boat.”

The Saudis can rightfully claim that “the pump and dump strategy” has been successful in the sense that market shares have been restored, said Hansen, adding that billion dollars’ worth of capex reductions from oil majors across the world will help support the price of oil return to a higher, longer-term and more sustainable level over the coming years.

Pessimism about the strength of the oil market recovery and concerns over the consequences of the so-called Brexit strategy dragged oil prices lower Wednesday.

Short-term supply disruptions triggered by wildfires in Canada and rebel attacks on oil installations in Nigeria, a member of the Organization of Petroleum Exporting Countries, weighed on market dynamics as demand for petroleum products spiked in part because of lower fuel costs. With markets already balancing on the back of modest global economic growth, the price for crude oil last week topped $50 per barrel for the first time in nearly a year.

A survey from Goldman Sachs described the recovery, however, as “fragile” given that many of the supply-side pressures, notably in Canada, were easing.

Last week, oil field services company Baker Hughes reported a net gain in North American rig activity, a metric that indicates the price is oil is bringing some operators back to shale basins in the United States.

Oil markets, already on the decline after OPEC reports the balance between supply and demand was unchanged month-to-month, weakened further early Wednesday.