CFTC: Oil Prices Rose Due to Supply and Demand
Charts above are from the July 2008 Interim Report on Crude Oil, from the Interagency Task Force on Commodity Markets. From the Executive Summary:
The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.
The world economy has expanded at its fastest pace in decades, and that strong growth has translated into substantial increases in the demand for oil, particularly from emerging market countries. On the supply side, the production of oil has responded sluggishly, compounded by production shortfalls associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in the short term, very large price increases have occurred as the market balances supply and demand (see top two charts above).
If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based on the evidence available to date, suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.
From p. 14 of the report: The depreciation of the dollar since 2002 has contributed to the rise of the dollar price of oil, but can explain only a portion of the overall run-up. This point is also evident in the bottom chart above, which graphs the spot price of West Texas Intermediate crude oil in several currencies. Clearly, oil prices have risen sharply regardless of the currency of denomination. Moreover, from mid-March through June 2008, the dollar was stable, whereas oil prices increased appreciably.
MP: I think the top chart above says it all. Since 2002, world GDP increased by about 30% and world oil production increased by about 12%. Demand for oil increased significantly, oil supplies were tight, and oil prices rose significantly.