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Upset About the Price of Oil? Blame Speculators

Filling my car for the long weekend cost $94. Ouch! This is what happens when speculators drive oil to $108/barrel. Why blame speculators? Allow me to explain:

Insght & Action

The Commodities Futures Trading Commission requires brokers to mark every single commodity trade as either speculative or commercial, effectively differentiating trading by pure financial traders looking to profit versus "bona fide" hedgers managing risk. The CFTC updates data every two weeks, and the latest speculative long position hovers near an all-time high 470,000 contracts.

Insght & Action

Let's connect the dots, overlaying the price of oil with the speculative long position:

Insght & Action

Now you understand my frustration at the gas pump. The 35 percent increase in speculative positions since April corresponds to a very clear $22 increase in the price of oil. Call it a "Syria risk premium" or a "bet on economic recovery." Either way, betting in the futures pits is costing us on main street.

Now here's the good news: Commercial producers are selling more oil than ever before, even more than in 2008 when oil hit $145. Your take away: The guys with all the oil think prices are high... that's why they're selling!

Another observation: Producers are selling more than twice as much oil as speculators are buying.

Insght & Action

One final point: Since total longs must equal total shorts, and speculators account for roughly half of current buying, speculators are buying almost as much oil as end users. End users will consumer the oil they buy, producers will producer more and traders will be stuck owning a lot of oil. Ultimately, price falls.

We win.

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