Dick Morris, who used to work for Bill Clinton, addresses this in a recent article.
"They argue that oil prices are, indeed, determined by supply and demand — not only the supply and demand for oil, but also the supply and demand for oil futures. (Oil futures are a commitment to buy 1,000 barrels of oil at a certain date at a certain price.)
Formerly, most of the investments in oil futures came from energy companies. The federal Commodities Futures Trading Commission (CFTC) sharply limited investments by those outside the business, to prevent precisely the kind of speculation now gripping the market.
But when the stock market slowed down in 2000–2002, outside investors decided to speculate in oil futures.
The new players were institutional investors like corporate and government pension funds, sovereign wealth funds, university endowments and other investors, guided by brokerage firms like Morgan Stanley and Goldman Sachs.
To avoid the CFTC caps, these investors moved their operations to London, setting up the International Commodities Exchange. Now they can buy all the oil futures they want.
Michael W. Masters, of Masters Capital Management, told Congress that the volume of investment in commodities futures soared from $13 billion at the end of 2003 to $260 billion by March of 2008.
After a while, the CFTC rescinded its limits on how much speculators could buy as long as they went through special “swap” desks at the major brokerage houses.
You can buy oil futures for only 5 percent down on margin, a bargain considering the 50 percent margin requirement for stock market equity investments. Because the margin requirement on oil futures rises as the due date approaches, few investors actually end up buying the oil; they just roll over their investments.
So the willingness of sellers to unload their oil futures, and of buyers to acquire them, sets up its own market of supply and demand that has more to do with determining the actual price of oil than even the global demand and supply for the product itself.
On May 20 of this year, Masters told Congress: “Commodities futures prices are the benchmark for the prices of actual physical commodities, so when index speculators drive futures prices higher, the effects are felt immediately in spot prices and the real economy. So there is a direct link between commodities futures prices and the prices your constituents are paying for essential goods.”
