Der Spiegel on the issue we discussed the other day:

The world consumes 86 million barrels of oil a day, but trading volume is 15 times as high. The difference represents bets on future price developments…

Within a year the price of a barrel of crude has doubled, from $50 to last week’s high of $100…Some analysts see prices rising to between $120 and $150, which would have dramatic consequences for the world economy. Similarly spectacular price developments have only occurred four times in the last few decades: in 1973, when the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo for the first time; in 1979, as a consequence of the Iranian revolution; a year later, when Iraq invaded Iran; and in 1990, when Iraq invaded Kuwait…

speculators now hold up to 45 percent of all oil contracts — three times as many as at the turn of the millennium. “Prices are being distorted,” says Senator Carl Levin, the ranking Democrat on the Permanent Subcommittee on Investigations, which is investigating the speculative trading of oil futures. If supply and demand were the only factors, the price of oil would be at least $20 lower.

How could this have happened?…Daniel Jaeggi, a former futures trader for Goldman Sachs, knows exactly how the business changed in the late 1990s. “The big pension funds began to diversify their investments, increasingly putting their assets in oil,” he says. The pension funds, according to Jaeggi, became the “driving factor in the market.”…Goldman Sachs was at the head of the pack. “They invented a new commodities index that also included oil,” says Jaeggi. The new index was wildly successful, and the more major investors put money into it, the more oil contracts Goldman bought and the higher the prices went. An enormous market force had been created.

Everyone jumped into the game. Morgan Stanley, Deutsche Bank and many other financial giants dramatically expanded their trading volume in oil contracts. Investment banks like Goldman even established their own oil reserves, acting as if they were energy companies like BP. They hoped to gain better insight into market events.

As a result, the trading volume in crude oil has almost tripled in the last five years, while demand for the liquid itself grew by only 1.9 percent per year.

Finally, some conflicting views of traders:

“Supply and demand cannot explain the high prices,” says Fadel Gheit of Oppenheimer & Co., a leading commodities analyst. Like many in his profession, Gheit believes financial investors are driving up prices. He’s reminded of the Internet bubble around the turn of the millennium. According to Gheit, oil is also seeing “excessive speculation” at the moment…

“I trade in news,” says Chris Motroni, 29. He earns his money as a small, independent trader on the NYMEX, with smaller trades and a lot of self-confidence. “The prices will increase to $115,” he says. Motroni loves the mood on the trading floor…

Question: what is the sound of an oil bubble that bursts? Does an oil bubble “pop” or “plop”? HT: Doug Martin

UPDATE

The AP on 3/10/08 discusses the shorting of the dollar and oil prices:

Light, sweet crude for April delivery rose $1.73 to $106.88 on the New York Mercantile Exchange after earlier setting a new trading record of $107.

Energy investors shrugged off a relative stabilization of the dollar and a cooling in tensions between Venezuela and its neighbors Colombia and Ecuador.

Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

“We’ve got a Fed(eral Reserve) meeting on the 18th that could see a sizeable rate cut,” said Brad Samples, an analyst with Summit Energy Services Inc., in Louisville, Ky. “So, it’s not over.”

Indeed, while the dollar fluctuated against the euro on Monday, many investors believe the greenback is likely to keep falling as the Fed continues to cut rates. Many analysts believe the rise in crude prices is not supported by the market’s underlying fundamentals, noting that supplies are generally rising while demand is falling.

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