Is speculation to blame for energy and commodity pricing?

Question

Newt Gingrich was on CSPAN this morning and said that if speculation was driving up the price of oil, that they would stay in that speculation even when oil price was receding!

Any fool realizes that being caught in a volatility of speculation can leave you with nothing if you place side bets using puts and shorts!

The average speculator sticks with investing in something solid, the commodity and or the equity itself, so as not to lose everything when something goes bust!. The level of funds that pour into these commodities is very large and that bid up is good til it fades. The larger funds control, because as they pull out the rug, the others lose value. They will do this over and over, sucking up the values and staying safe and not being noticed too much.

But no doubt, there is a whole lot of speculatin going on!

Answer 1

Markets are speculation.  J.P. Morgan advised the young man who asked what is the going to do?  That it would "fluctuate."  Funds are one of the components of institutional money that drives the price of a stock.  Know what the institutional traders are doing and you have a good insight into where a stock will go.  It is not unfair that institutions have more power in the markets than one small investor.  It is just a challenge you must keep in mind.  Yes, you can be blind sided.  The trick is to avoid making the same mistakes on a repeated basis. Knowing that you will go with a "hunch" over your set rules.  Usually, you pay the price for breaking your own rules.  We are all our own worst enemy.  Void your mind of emotion and you will have a better performance record.  

Answer 2

speculation has little/nothing to do with it.

there needs someone on the other side of the trade.

blame inelastic demand curves and geopolitics, but not speculation.

do you really think that speculation is a new phenomenon, anyway?  of course not.  there was just as much speculation 30 years ago as there is today.

the price can only be determined by consumers and the limited supply which they demand.  speculation is over-hyped.  poor people just want to blame rich people for all of their problems.  give me a break.

Answer 3

in the long-run the most important factors in pricing are, of course, supply and demand.   there is a lot of debate out there regarding "peak oil", and for the last 100 years there have always been "experts" out there saying that we've taken all the oil out of the ground, and from here on out, it's all downhill.  Read Daniel Yergin's book, The Prize, which is the absolute best, most comprehensive, incredibly well researched book on the subject of oil.   Some of the world's foremost experts believed America would run out of oil before they even discovered oil in Texas!

But anyway, yes there are other factors, like OPEC and their pricing controls, but all they're doing is tinkering with the supply part of the supply/demand equation.   speculation in the markets probably adds to volatility, but the oil futures market is so huge, that there's only so much that speculators can add in terms of pricing swings.

as far as other energy costs, again, supply and demand, although many power plants burn natural gas, so those prices affect electricity pricing.   also, the weather.   many states' markets were 'deregulated' (although restructured is a more accurate term since there's still plenty of regulation) in the late 90's/early 2000s, but before utilities' profits were pegged to a certain return on equity.  and excess profits would be returned to customers.  now, pricing is more competitive, and profits vary widely company to company based on their spark spread, which is basically the electricity industry's version of gross profit margin (electricity revenues minues cost of fuel, be it coal, gas or uranium)

Answer 4

No, the role of speculator is to provide liquidity in the market.

One of the reason the commodity is push so high is because the money is moving from stock market and real estate into commodity.

it all works based on supply and demand. lets put it this way, say 1 future oil contract is for 1000 bbl oil and there is 1000000 bbl produce so there is 1000 future contracts available. imagine with the money rushing in to commodity there there is 10000 people want to buy that 1000 future contract so what happend the price is guarantee to go up.

since the demand for commodity is so high from people want to buy the contract as well as the real commodity demand from china and india and other countries, the price is push so high very quickly. also the value of US dollars is also declining for sometimes now, which is  also another reason people/institution put their money to commodity (gold, etc...) to protect against inflation.

one the inflationary pressure is ease and the financial sorted out the problem, it will build convident for people to invest back to stock market, the money from commodity will flow back to stock market or real estate and it will ease and bring back the sustainable fair value for commodity.

that's my 2 cents, hope it helps.

Cheers