Now it’s semi-official. A respected financial figure, no less a central bank chief with his reputation still intact, has said in bureaucrat-speak that speculation may indeed have had something to do with recent oil price moves. That view was nearly heretical until the rapid fall in oil prices began in July.
From the Financial Times:
The oil price shock that has hit global growth could have been exaggerated by financial speculation, Jean-Claude Trichet, European Central Bank president, suggested for the first time yesterday.
Yves here. Different turn of phrase, but similar to the argument made by George Soros earlier this year.
Going further than comments by other central bankers, Mr Trichet argued it was “reasonable conjecture” that financial investors had distorted commodity markets, leading to prices above those justified by fundamental supply and demand factors.
His remarks were significant because they indicated policymakers believe this year’s peaks in oil prices were unsustainable…
Further falls in energy prices would strengthen ECB optimism that weak eurozone growth will be followed by a “progressive recovery” later this year.
Speaking at a Centre for Financial Studies “ECB watchers” conference in Frankfurt, Mr Trichet argued that, in one “benign” view, investors could have played a helpful role in commodity markets by expanding liquidity and making price-setting processes more efficient. The volatility created “might have been the price to pay to avoid even higher volatility in the future”, he said.
That is long-form for “meddling can have unexpected consequences”.
But the ECB president also said that financial investors had encouraged sellers to accumulate inventories or delay production, so as to take advantage of expected higher prices. This could have exaggerated changes in prices beyond what would have been expected by fundamental economic factors.
Mr Trichet added: “If this seems to me a reasonable conjecture, I admit, though, that existing evidence does not provide uncontroversial support the notion that non-commercial investors in futures markets have been systematically playing a significant role in pushing spot prices out of their fundamental equilibrium.”
Sadly, that shows that the officialdom still does not comprehend that oil contracts (the kind commercial buyers enter into with producers, not the futures exchange type) set prices based on futures marker prices, not spot. It’s troubling that someone like Trichet, who has staff that can get to the bottom of things on his behalf, does not understand price setting mechanisms in a market so important to his policies.