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Can the market truly be manipulated? Are there
speculators or others who can drive the oil
market to the price they want? - so that they can
make millions at the expense of other investors
and consumers?

Let’s take a look at this - specifically, at the oil market.
Can speculators or other market participants
generate an artificial acceptance of higher prices?
Pure supply and demand theory says that this is
impossible. Without being too technical, economic
theory states that for a given level of supply and
demand, there will be a market clearing price, known
as the equilibrium price. If supply/demand is such that
the clearing price is $80 a barrel, no independent
seller will be able to charge a higher price and be
able to sell their oil, holding everything else equal.
How can any group of participants move the price of
oil higher and how can the price remain high when it is
ultimately reconciled with demand that supports a
lower price? They can only do that if they control the
market or are a huge participant in the market, such
that their independent moves drive the market.

Now let’s move the discussion into the oil futures
market. There are those who believe that trading in
the futures market can be manipulated, and that
manipulation can affect the spot or cash price. Of
course, this also shouldn’t be possible according to
economic theory, for the same reasons as above. To
address the connection between the futures market
and the spot market, let’s say that both markets prices
normally move together. So if the spot market goes up
by $2, the futures market prices normally go up by a
very similar amount. The relationship between the
futures prices to spot prices does not change
normally. The relationship involves whatever carrying
cost, both physical and financial, is associated with a
particular commodity. Any general shift in supply for
example, should shift current and future prices
together very closely.  

But is it possible for some traders, by manipulating
future oil prices upward, for example, to artificially lift
the spot/physical price? Some people believe it is
possible and it happened in 2008 and may continue
today.  Of course, this implication affects more than
just investors - it affects the entire economy.

Some believe that since some commodities, such as
oil and gold, are now traded as asset classes by
hedge and other investment funds, their prices can
now be influenced much more by the huge volumes of
money being invested in them. The degree of
investment in the futures market itself can drive
market distortions, they say. The amount invested in
the oil and other futures markets has risen
tremendously in just the past few years. For instance,
the amount in the oil futures market rose from $13
billion in 2003 to $260 billion in 2008, a 20-fold
increase. And this greater money did and may still be
pushing those commodity markets out of equilibrium.  

Very large speculators can certainly influence the
prices of futures contracts. They do so by bidding up
prices with purchases that are significant percentages
of the market. This is much easier to do in the futures
market than in the spot market. For one, futures
contracts can be controlled with just a small fraction of
capital in relation to the amount of oil being controlled.
Other means of manipulating the market can involve
rumors spread to traders through the media and other
means. This can become somewhat of a self-fulfilling
prophecy.

Click here to go to
Oil Manipulation Part Two.


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_________________________________________
Is the Price of Oil Being Manipulated?
Or Is There a Shortage of Oil? What is
Driving the Price of Oil?  Part One.
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