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Tchocky · 07-09-08, 10:38 AM

Hmm, speculation doesn't look too likely.

If the price is artificially above the logical point where quantity demanded meets quantity supplied, then we'd see excess supply. In other words, people holding onto oil in order to sell it later - which is, in essence, speculation. Believing that the hold value of oil exceeds it's immediate sale value. Therefore we'd be seeing lots of oil-holding, inventories rising sharply. But that has not been observed.

The unfortunate truth is that oil production has been relatively flat for the last 3-5 years, whereas demand has skyrocketed. This has happened for all raw materials, due to increased economic appetites in places other than the developed, price-sensitive West. Iron ore is not traded on an exchange, so there is no easy place for speculation to occur like ther is in crude oil. However, over the past year the price of iron ore has jumped 75-95% due to increased demand. This is similiar to what has been happening with oil. Excess capacity has declined rather sharply in oil-producing countries, Saudi Arabia in particular had over-estimated their reserves. This increases the risk premium on oil production, given that there is a smaller margin of safety and a lot of oil is produced in politically unstable countries.

Not to forget the unfortunate slide of the US dollar in the last several years. A major part of the oil price rise can be attributed to this, given that US dollars are the agreed upon pricing currency for crude, although this looks to be changing, albeit slowly.

07-09-08, 10:38 AM	#3
Tchocky Navy Seal Join Date: Jul 2004 Posts: 5,874 Downloads: 6 Uploads: 0	Hmm, speculation doesn't look too likely. If the price is artificially above the logical point where quantity demanded meets quantity supplied, then we'd see excess supply. In other words, people holding onto oil in order to sell it later - which is, in essence, speculation. Believing that the hold value of oil exceeds it's immediate sale value. Therefore we'd be seeing lots of oil-holding, inventories rising sharply. But that has not been observed. The unfortunate truth is that oil production has been relatively flat for the last 3-5 years, whereas demand has skyrocketed. This has happened for all raw materials, due to increased economic appetites in places other than the developed, price-sensitive West. Iron ore is not traded on an exchange, so there is no easy place for speculation to occur like ther is in crude oil. However, over the past year the price of iron ore has jumped 75-95% due to increased demand. This is similiar to what has been happening with oil. Excess capacity has declined rather sharply in oil-producing countries, Saudi Arabia in particular had over-estimated their reserves. This increases the risk premium on oil production, given that there is a smaller margin of safety and a lot of oil is produced in politically unstable countries. Not to forget the unfortunate slide of the US dollar in the last several years. A major part of the oil price rise can be attributed to this, given that US dollars are the agreed upon pricing currency for crude, although this looks to be changing, albeit slowly. __________________ [SIGPIC][/SIGPIC]