Rising oil and food prices – are speculators about to be regulated?

23rd August 2011

Are high oil prices the result of tight fundamentals or pure financial speculation?

The Financial Times (paywall) poses this question in an editorial and goes on to cite studies that blame both fundamentals, but crucially speculative activity too for the rises.

The European Central Bank has just published a study in which one of its economists joins the trend of blaming both fundamentals and speculators, saying that "some speculative and trend chasing behaviour may have been adding to oil prices" since 2004.

The research paper is called ‘What is driving oil futures prices? Fundamentals versus speculation' and has been written by Isabel Vansteenkiste.

The timing of the report coincides with a likely clampdown in the activity of hedge funds, pension funds and other large financial investors in energy and commodities markets.

FT.com report that the paper follows on the steeps of a recent influential study by Kenneth J. Singleton, of Stanford University, which also blamed financial speculators for some of the oil price gains of recent years.

Earlier this year Oxfam singled out speculations for a rise in the price of food.

The news website Al Jazeera ran a comment piece which argued that the "living standards of millions of plain folks, are now at risk from the sudden rise in oil and commodity prices".

It laid the blame for the rises on speculators. "While it's true that natural disasters and droughts play some role in this unchecked price inflation, it also seems apparent that something else is attracting increasing attention… unchecked speculation!

It quotes one analyst Phil Davis saying: "Who is buying 287,494 contracts (1,000 barrels per contract) for May delivery that can't possibly be delivered for $2.49 more than they were priced the day before? These are the kind of questions that you would think regulators would be asking – if we had any."

As markets i.e. shares become more volatile – so therefore the oil price rises.

With global inflation likely to subside any time soon, those who bet on oil and food prices may find themselves the next target of regulators.

 

More:

Investing: five things you may want to consider doing now

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