Environmental Engineering Reference
In-Depth Information
favourable price changes in order to protect themselves from unfavourable
price changes.
Speculators are the precise opposite: they hope to profit from the very
price changes that hedgers seek to avoid. That is why they will buy what
hedgers want to sell, or sell what hedgers want to buy. So a speculator
might buy a future contract for oil at $70 from the hypothetical company
above in the hope or expectation that they could sell the oil on for more
than $70 within the four years. They could equally buy a futures contract,
or the right to sell that chemical company oil at $70 in the hope or expec-
tation that the actual cost of supplying the chemical company will be less
than $70 four years hence.
So the speculator and hedger are a useful, indeed necessary, match for
each other. They don't have to be an
exact
match; it is just useful to have
enough speculators to make deals with hedgers whenever the latter want
to cover their risks. The main information we have on the relative weight
of these two groups comes from surveys by the Commodity Futures
Trading Commission, which regulates the US futures exchanges.
According to the CFTC, hedgers - whom it defines as people with a
physical interest in oil - are on average roughly two-thirds of all market
players, with “non-commercial participants”, or speculators, the remain-
ing third. When there are enough participants so that it is easy to quickly
find a price to make a deal with, the market is said to be “liquid”; when
there aren't enough the market is said to be “illiquid”.
Driving up the price?
One of the main oil-market trends of recent years has been the increase
in spread betters, who speculate on differences between futures prices
in different months, rather than on the overall future level of crude oil
prices. But there is also no doubt that so-called “momentum speculators”
have entered the market to drive the price up or down faster than any
reasonable examination of the fundamentals of oil supply and demand
would warrant.
Indeed, such bandwagon speculators are not interested in boring details
like the fundamentals. They just follow momentum strategies that dictate
buying whatever is going up in price or selling whatever is going down.
This increases volatility - the way in which the oil-price jumps around.
Oil is not the most volatile of energy products: the price of electricity can
vary betwen three hundred and four hundred percent during a day's trad-
ing because it's not storable, yet it's something that people usually need
