Speculation Playing “Significant Role” in Oil Price Surge
The recent surge in oil prices cannot be explained by economic factors alone, meaning speculation has played a “significant role,” according to the International Monetary Fund.
In an analysis in its Regional Economic Outlook for the Middle East and Central Asia, the IMF says “The recent surge in the oil price (from $80 to over $100 a barrel) seems to go well beyond what would be indicated by the growth of the world economy.”
Producers in particular argue that fundamentals would yield an oil price of about $80 a barrel, with the rest being the result of speculative activity.
The IMF says one way to get a sense of speculative activity is to compare movements in the real price of oil with the real price of gold. This relationship has been surprisingly close for a long period of time. Gold is well known to be a highly speculative commodity, driven by factors other than derived demand, the IMF said.
“One could reasonably argue that this relationship, which has continued in 2008, is
evidence of speculative behavior in oil. If the oil price does fall significantly in the near term, it may reflect more the unwinding of speculative positions in both gold and oil than indicate that a recession is under way.”
“In summary, it appears that speculation has played a significant role in the run-up in oil prices as the U.S. dollar has weakened and investors have looked for a hedge in oil futures (and gold). ”
As financial market conditions settle down, fundamentals should take over and oil prices should come down further from the highs recently observed.
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