That might be a fairly illiquid market, so speculators step in to provide liquidity. Speculators can just as easily be net short as they can be net long.
In your view, what do you think needs to happen?
While I don't think that speculation is a primary cause of the rise in oil prices, I am in favor of greater transparency in trading. Large amounts of speculation can cause day-to-day volatility, but without hoarding it is unlikely to have an impact that lasts more than a day or two. A great deal (approximately 30%) of trading in oil futures is done offshore where players do not have to reveal the size of their positions.
Requiring U.S. investors to report their total positions, not just the ones in U.S.-based markets, would be useful, but I doubt it would make a significant impact on the price of oil. As things stand now, the CFTC cannot, by law, track or regulate electronic trading of energy futures.
Raising the margin requirements would be useful in reducing leverage in the system. While unlikely to significantly change the price of oil (since it would have to apply to both long and short positions), we have seen what excessive leverage has done to the mortgage market. We don't need a repeat in the commodity markets.
While the rise in the price of oil has been getting most of the attention, oil is far from the only commodity to have soared in value over the last several years. Of the 27 largest commodity markets, all are up over the last five years, 20 of them by more than 100%, and 8 by more than 200%.
So could it be that the speculators are doing this on all the commodity futures markets at once? That doesn't seem likely, and would still not explain why commodities which are not traded on futures markets are seeing similar price increases. The prices of both iron ore and coal have both roughly doubled over the last year, and those are sold via bilateral deals, with no futures contracts available for them.
Which industries look strongest to you in the current environment?
Even if oil prices remain stable or decline slightly from current levels, oil service firms and drillers like Transocean (RIG), Diamond Offshore (DO) and National Oilwell Varco (NOV) should have strong earnings growth baked in the cake through 2008. Cash flows at the oil companies (the clients of the industry) will remain strong. It will still be very worthwhile to explore for and develop oil fields, resulting in strong demand for the group.
Then we have aerospace and defense.
