Can Oil Futures Manipulation Affect Prices?

Can Oil Futures Manipulation Affect Your Cost At The Pump?

As the price of oil – and consequently gas – has risen, there have been many questions as to why the price has skyrocketed. In recent years the question has been posed as to whether it is possible to use oil futures manipulation to drive up the price of oil and profit at the expense of consumers and other investors.

There are conflicting opinions on whether this is possible. The laws of supply and demand dictate that is is impossible, while some economists and analysts claim that speculators can create an artificial market where higher prices are accepted and paid.

So who – or what – is to blame for higher oil and gas prices? There are several possible scenarios for what drives oil prices higher and lower.

Oil Futures Manipulation: Supply And Demand

The laws of supply and demand render oil futures manipulation unfeasible. Economic theory states that for a given level of supply and demand there will be a market clearing price, referred to as the equilibrium price.

All things being equal, if the supply and demand dictates the clearing price is $50 per barrel, no independent seller would be able to charge a higher price while still being able to sell their oil. This theory makes it impossible for a speculator to drive up the price, or keep the price high for any length of time.

So how can any group of participants move the price of oil higher? How can speculators keep the prices higher even after there has been a reconciliation between supply and demand? This is only possible if a speculator either controls the market, or they are such a massive participant their independent moves drive market prices.

Oil Futures Manipulation: The Connection Between The Futures Market And The Spot Market

There are those that believe that oil futures manipulation is possible, and that manipulating oil futures can affect the spot price. While this should be impossible, some analysts claim that in certain situations an artificial market could influence oil prices, even if only for a short time.

In order to address the connection between the spot market and the futures market, we can assume that the both the spot market and the futures market move together. This means that if the spot market rises by $1, the futures market will rise by a similar amount. For example, any shift in the oil supply should move current and future prices together closely.

The idea that large institutional investors can manipulate commodity price for their own personal gains has far reaching implications on both prices as well as the economy in general.

Some people believe that the trading of certain commodities by hedge funds and other institutional investors as asset classes can influence spot prices based on the massive amounts of money invested by these funds. They assert that the degree of investments in these markets can distort the markets.

Very large speculators can absolutely influence the cost of futures contracts by bidding up the prices with purchases that are a significant percentage of the market. Because futures contracts can control a large amount of oil with a relatively small amount of capital, this manipulation is easier in the futures market than in the spot market.

Speculators can also use the media and other means to spread rumors to traders, creating a self-fulfilling prophecy.

Although there are several scenarios where market manipulation influences the spot price, conventional wisdom dictates that at some point the market should return to its supply and demand equilibrium. This is due to the fact that although some investors may have enough money to drive up prices artificially, buyers will eventually know whether these price increases were justified.

There is also the possibility that these speculations could cause producers to horde their oil supplies or increase production, causing an overcapacity, which could ultimately drive prices lower.

Ultimately, it is most likely a combination of factors involved in short-term oil price increases. As oil supply is not something that can be influenced greatly in the short-term, and the estimated global oil consumption is constantly changing, it stands to reason that oil prices will be highly volatile.

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