Traders are major factor behind oil prices

Heavy trading in oils futures push crude oil prices beyond what would be typically expected based on current demand levels.

By JON CHESTO
The Patriot Ledger

In recent months, heavy trading in futures contracts have pushed oil prices well beyond what would be typically expected based on current demand levels. Investors have turned to crude oil for profit potential in the wake of turmoil in the past six months among stock markets and debt investments. Typically, demand for oil slows down in the United States at this time of year as the heating season ends and many power plants and refineries go offline for maintenance work.

“This is when you start to see prices soften before they start to rise again in the summer,” said Rick Mueller, director of the oil practice at Energy Security Analysis Inc., a consulting firm based in Wakefield. “(But) the investors ... look at oil as a pretty safe destination. They’re buying up all these futures contracts. That’s putting a lot of pressure on prices.”

The heavy trading of futures contracts for crude oil delivery helped push prices for a barrel of oil to the $100 range in January, roughly twice the price for crude futures at the same time a year ago.

Normally, when prices climb so quickly, Saudi Arabia or another member of OPEC can open the spigot on oil production and flood the world market, Mueller said. But OPEC’s excess capacity has shrunk considerably in recent years amid soaring demand in developing countries such as China and India. Meanwhile, production levels among non-OPEC countries hasn’t grown as quickly as expected, Mueller said.

“In a lot of ways, this is really a new market for us,” Mueller said. “We’ve had several years of very strong growth. That’s eaten up the excess capacity we used to have. ... If something goes wrong, there won’t be a safety margin.”

Some experts also say the federal government is partly to blame for not releasing some oil that has been stockpiled in the Strategic Petroleum Reserve. The federally maintained oil storage system holds more than 700 million barrels worth of oil for a future emergency.

“At this point in the market, every barrel helps,” Mueller said.