IMO, it is not speculation per se that causes excessive volatility in this market but rather the usual suspect — excess leveraging. I believe this contributed to the huge run-up in prices last summer, and may even have contributed to the strong price advances of the last few months. A capital ratio requirement is in order.

Much more likely is a reduction in supply by oil producers. A price anything like $20 or even $34/bbl would squeeze marginal operations, encouraging producers to idle them, thus removing the excess supply. I therefore think it is highly unlikely that we will visit these prices except as a brief episode. The steady decline of the USD against other currencies make this an even more unlikely event.

reversion is never a given but to believe that long only index funds and the various [other] specs can hold price above 30 in the midst of global depression and evident overproduction seems, imo, a bit mystical.

a drop into the teens and below would not surprise.

Actually, the point of the article was: "Amidst a world-wide recession, oil prices have been heading higher this year — clearly not driven by demand, which is low, but by speculators."

I was merely showing how speculation plays a role in setting prices.

I'm not exactly sure how you pulled "$30 was overdoing it" from that piece.

Anon1, you're arguing over semantics.

I'll just cite wikipedia:

"income that is not consumed by immediately buying goods and services is saved…the part of a person's income that is spent on mortgage loan repayments is not spent on present consumption and is therefore saving by…definition, even though people do not always think of repaying a loan as saving. However, in the U.S. measurement of the numbers behind its gross national product (i.e., the National Income and Product Accounts), personal interest payments are not treated as "saving" unless the institutions and people who receive them save them."

Totally useless to the economy and US government, though good for the people themselves. The so-called "savings increase" is bullcrap. Paying off one's credit cards and loans is NOT saving. It is spending down debt.

And the article from the Post that you presented to us make the same point. Just because the economy doesn't have the juice to support $80 doesn't mean it's going back to $30.

gullschasedship: "2 million is pocket change, considering the world uses 80 – 90 million barrels per *day*."

markets just don't work that way…especially markets as inelastic as oil…the marginal bbl of oil added or subtracted from total supply +/- paper supply is where prices are set.

In addition to Hugh's point, the bigger US supply picture shows 1.1bn total petroleum products on hand (1.8bn if you count SPR stocks)…an all-time record. Total OECD days supply on hand is in the low to mid-60's, depending upon how much is floating around off the grid, also an all-time high. Not to mention China knocked everyone out of their seats last week when they reported having 3x more oil stockpiled than originally thought.

OK. let me take this apart for you. First, current US oil stocks are as of last week 350 million barrels.

http://tonto.eia.doe.gov/oog/ftparea/wogirs/xls/psw03.xls#'Data 1'!A1

This is actually down from the 375 million level of May 1. To find a comparable period when we had these kinds of stocks for this long you would have to go back to 1993. So yes this is unusual.

Oil is not a spigot that you can turn off for a few days and clear what you have in storage. There are millions of barrels that are always in the pipeline. So what we are looking at is a huge amount of oil over and above what is being used. Oil stocks for this year are running 50 million barrels ahead of last year. With supply in the pipeline exceeding demand, how exactly is the excess oil held in storage going to be cleared? Answer: Not easily.

2 million is pocket change, considering the world uses 80 – 90 million barrels per *day*.

I think a correction to $45 – $55 per barrel for the rest of the year is likely. With global demand increasing thanks to the modernization of China and India, but $30/barrel?

That's very unlikely.