How could speculators actually make the price of oil rise??

Question

So, you have a the refineries and other buyers of crude oil on one side and the oil companies or oil exporting countries on the other. When they talk about speculators, I assume they are talking about the futures. I'd like to know precisely the explanation from someone who has that viewpoint how they could affect that price? I can only imagine it is offer and demand since if there was too much oil, prices would go down, if there was not enough, prices would go up. Speculators needs to buy a futures contract (long) or sell one (short) to enter the market. But at the end of the month, when delivery is to occur, they have to liquididate their position so it becomes neutral. If there are more buyers (refineries etc) of crude oil than there are sellers, high prices will be justified and go even higher. If on the other hand, there is not enough buyers, those speculators will be stock with their contract and need to sell them at a cheaper price (because they don't want a delivery).

Answer 1

Edit. Ok, I misunderstood your question.

As the expiry date of a futures contract approaches, the majority of position just roll over. The big bulk of these positions are initiated by indexers (S&P GSCI, UBS Bloomberg CMCI ...) on behalf of index buyers to get rid of the inconvenience of rolling over contract each month. Close to expiration, Goldman, for example, exits this month's contract and enters a new futures contract. That of course depresses this month prices and inflates new futures prices.

This mechanism is not necessarily inflationary per se. The main variables I think of much more importance are the Open Interest and Volume. They both show how many new long contracts are created. It is true that each long should be matched with a short position. However, when more people get interested and want to enter the market (for obvious reasons), this brings more buyers and sellers.

Contrarily to stocks for example that has no expiry date, the nature of futures market (that is of monthly expiry, and those who wish to stay in the market need to sell their current positions and buy new contracts) artificially increases trading frequency and therefore the Open Interest. As more money is rushing into the oil market, it means that more people are entering long positions. Of course each long positions is matched with a short position, but in most cases, those who went short, do so only to liquidate their current positions and go long new ones (that is roll over). This mechanism creates a congestion where, at any given time, more long positions are created for new futures contracts than short positions as current futures contracts are destructed.

Here is an example imagine that there are 2 parties. A is long and B is short 100 speculative futures June contracts and another 100 July contracts at the price of $135 and $140 respectively. As person C enters the market to buy let's say 50 June contracts from A, A will use the proceeds to go long July contracts. Now we will have 100 June contracts and 150 July contracts which drives July prices higher to $145. By the end of June, all A, B and C may wish to close their positions for June contracts by offseting (that is each takes the opposite position).This make June contracts and by the end of June we will have 250 contracts all for July delivery (as all June contracts are destructed) this inflates the OI on July prices to let's say $150.

You asked what about June (spot) prices. It is indeed crashed as all demand moves to July, but spot prices are irrelevant as virtually no one uses it (I mean physical traders and hedgers) only buy at the futures price (and it is the futures price that is shown not spot). At the beginning of June, traders bought oil at $135 futures prices for delivery at the end of June. It is not possible for the futures price to move below $135 at the end of July as long as OI is increasing. And even if we imagine that by the end of June, the price moves down, this is irrelevant, because all buyers already locked in the price at $135, $140, $145 and $150.

You need to think of Supply/ Demand and Buyer/ Seller in terms of “futures contracts” not in terms of actual oil delivery. Physical oil buyers still need to buy at “futures contracts” price, that is inflated because of increasing demand for these contracts.

Answer 2

I am a big player on oil trading, from Wall street firms like Morgan Stanly or Goldman & Sachs, etc.

I bought millions and millions of barrels of oil when they were in the range $60--$100 a barrel.  I expect to make a kill when I sell. But right now it’s only $135 a barrel.  Following are my difficulties. Please advise:

Difficulty 1)

Congress is now investigating on oil speculation, but if I sell right now, I would  not make a large profit. Unless the price is in the range of $160--$200. My agents  already feel the spin out to the media : “Oil future looks high, expecting in the range of $200” But it seems not working price up as fast as I expected

Difficulty 2)

Saudi Arabia has raised production. China has raised its domestic gas price by 17% to curb the demand. But those measures would drive the price down. How do I counter them ?

Difficulty 3)

How do I play scapegoating game well ? How do I  make a handsome profit while without being responsible for the oil price hike ?  Recent Israel Iran-Attack drill would disrupt oil supply region. But Israel is US ally. And media and think tanks would not permit it.

Difficulty 4)

How about playing the US old scapegoat China ? The recent feeler that “ China is the second largest oil consumer “ seems spinning well. Nobody questions that China is actually importing less oil than Japan, and much less do they  know what is net import on oil.

What do you say?  Please advise.