| naturally short (betting on a fall) as producers tend to buy futures to guard against falls in prices. In 1990, only 13 per cent of open interest in crude oil futures was long. That is now up to 58 per cent and according to me it is a clear danger sign. If and when the oil bubble burst and the longs (betting on a rise in price) have to square their positions or give more margins, the oil prices could come crashing down. And there is no shortage of commodities in the US - although many fear there are constraints elsewhere in the supply chain.
There are arguments against this. Big economic factors are at work, notably the weakness of the dollar. Federal Reserve officials note that there is no sign of big increases in inventories of commodities. This would be expected if speculators were betting on prices to rise.
Speculation appears to be changing the way commodity markets work. A debate is needed and changes to regulations may be justified. But speculators cannot take all the blame for the price spike.
If the global economy is heading towards a recession, as was proclaimed by leading experts after the sub prime mortgage crisis in the US, then the consumption of oil will also drop to some extent.
Right now it seems we are going to repeat history and the stock markets took a serious tumble as if the 1980’s scenario is being repeated. The silver lining to the 1980 crash was that stock markets not only recovered later in the year but also made significant gains. Let us just hope that if history repeats itself, it does so in totality and not in bits and pieces.
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