As Brent crude oil reached more than $68 per barrel Wednesday, a high for 2015, analysts started to backtrack on earlier predictions of $40-$50 oil. The rebound, however, may not last: Speculators appear to have disrupted Saudi Arabia’s strategic game against U.S. shale oil producers.
Predicting oil prices is a risky endeavor. They are determined by a multitude of political, economic, psychological and climate-related factors that cannot be modeled with accuracy. So analysts would suggest that Brent is rising because of unexpectedly fast demand growth in China; another bout of trouble in Libya, where a key oil port has shut down; a decrease in U.S. inventories; the continuing fighting in Yemen; and any number of other events.
It’s just as likely, however, that oil’s rise is driven by hedge funds holding a net long position of 550,000 futures and options contracts, or 550,000 barrels of imaginary oil. Arguably, when the actual crude oil supply is about 92.5 million barrels a day but futures markets trade about 1 billion barrels a day, speculators are more important than any real-world factors in determining the price. The speculators, though, listen to the analysts who do their best to take the real world into account. That means there’s contamination, making the price movements even more unpredictable.
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