OIL is one of those markets that are so capricious that it’s hard to resist trading. For those who have dipped a toe into the so-called liquid gold within the last year, it will have been a particularly rough ride.
After hitting lows of $34 in December, when actual and perceived demand for oil fell dramatically in line with the global economic downturn, the price had doubled by June. Now the bears appear to be back in control. Last week’s oil inventory data showed much higher stockpiles than expected and sent the markets into a tail spin. Light crude CFD futures for November – the current “front month” for trading oil – suffered their biggest weekly loss in more than two months, dropping 8 per cent.
Despite the sudden plunge last week, oil is actually still very much range-bound, trading between $65 and $75 for several months, a period of relative stability, and speculation over when we will see a breakout from these ranges keeps the chart lovers busy, but this is after all within the bounds of what the secretary general of OPEC regards as a “fair price” for a barrel.
Oil price volatility might be a big draw for CFD traders but it hasn’t gone down too well with governments and regulators, or of course big users of oil. New regulations which limit futures positions on oil are rumoured to be in place by the US government before the end of the year. If so that would be despite the US Commodity Futures Trading Commission finding no evidence that speculation is responsible for the dramatic swings in oil prices, or that speculators are responsible for the swings rather than merely reacting to them.
The impact of any new restrictions on oil derivatives trading is causing much debate; a kind of “speculation on the impact of anti-speculation”. Although some analysts believe they may trigger a 30 per cent plunge, I see volume limits as having at the most only a moderate chance of a short term knee-jerk reaction of pushing prices significantly lower, and the restrictions may even increase volatility as funds have to work harder to maintain returns.
Ultimately, as with all commodities, fundamental supply and demand swings are the largest determinant of price, and as the world’s economies recover, much as it might not suit politically, the oil price will follow.