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Tuesday, June 17, 2008 

Why the price of crude Oil is so high? Do you have any idea?

Since 2006 that we are seeing the price of crude moving dramatically up, with many people pointing the movement as a consequence of the demand, but is this really truth? Of course not, the demand is one of the reasons but there are other reasons well structured that are making this commodity fly so high, the speculation behind some funds, banks and other financial groups. Did you know that the whole of these entities could be responsible for nearly 60% of the price of crude? Yeah, is truth. Recently I read an article from F. William Engdahl relating this fact, for this American economist and journalist, a specialist in energy issue, no crisis of supply justifies the level of prices today.

In this article, he argues that at least 60% of the price of oil comes from speculation on the futures market, orchestrated by hedge funds, banks and financial groups. Engdahl also considers that the "peak oil" - the argument that the production of oil reached the point where more than half of the reserves was used - is a deception that helps speculation. Looking carefully for the latest crude targets of some financial groups we can have the right perception that all are acting together to sustain this speculation at these levels, using the Chinese economy and the recent earthquake as the cause - an absolute nonsense. One of the stories used to support the speculation in the futures contracts for oil is that Chinese demand for imported oil explodes outside any control, leading to an imbalance between supply and demand. But the facts do not support the thesis of Chinese demand.

The EIA (Administration for information on Energy) of the U.S. government concluded in its latest report "Short Term Energy Outlook" which is expected that the demand for oil in the United States decline this year by 190 thousand barrels per day. This is mainly due to economic recession that widens. According to the EIA, it is hoped that the Chinese consumption, far from exploding, rise this year only 400 thousand barrels per day. This is hardly a "sharp increase in demand" attributed to China in the media [which justify the higher prices for crude oil]. Last year, China imported 3.2 million barrels per day and its consumption was estimated around a total of 7 million barrels per day. To compare, the United States consumed about 20.7 million barrels per day. This means that the nation consumes more oil, the United States, call for a significant fall in demand. China, which consumes only a third of consuming the United States, will have only a minor increase of imports, compared to the daily world oil production of around 84 million barrels [now], less than half percent of demand total.

In addition, the OPEC forecasts on the growth of world demand for oil shall remain unchanged at 1.2 million barrels per day, while the slowdown in economic growth in the industrialized world is offset by a slight growth in consumption in developing countries. The OPEC states that the world demand for oil in 2008 will be an average of 67 million barrels per day, without suffering major changes in relation to previous estimates. It is expected that demand from China, the Middle East, India and Latin America is strengthened, but the demand of the European Union and North
America will be weaker. The largest consumer of oil in the world is thus faced with a drastic fall in consumption, which is likely to worsen as the economic effects associated with housing and financial crisis. In normal markets and transparent, the price of crude oil should fall further instead of rising. No crisis of supply justifies the level of prices today.

We can conclude that behind this move on crude there are no more then few financial groups, banks and funds, making a lot of money with the misery of developed nations and dependent on oil. We should blame our government for the lack of control of these speculative movements that bring huge losses to the global economies, and that in no way contribute to social welfare.

Chart courtesy of stockcharts ( click to enlarge )

The technical chart shows very strong upward momentum as the crude is trading above the 50 day moving average with both 50 day and 200 day moving average going up. Although the chart shows a Bullish trend, the short term shows some weakness signals, as MACD fast line is just a few points to cross below slow line and KD showing some weakness as K line is below D line.
Time for profit taking !!!

Disclaimer : Trading stocks involves risk, this information should not be viewed as trading recommendations. The charts provided here are not meant for investment purposes and only serve as technical examples.

That's All. Have a nice day !!!

AC

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  • I'm a 43 year old Independent Trader using proprietary technical analysis with more than 18 years experience of investing in the US stock markets. I started this blog in 2006 simply as a way to share my thoughts about capital, risk management, and trading. My blog contains only my personal opinion and is provided for informational purposes only.

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