But can futures market manipulation affect the true cash or spot price of oil? It can if, for instance, suppliers believe the futures price movements truly reflect the “correct” market and horde their oil in the hope of higher profits later. This lowers supply and/or raises price in the cash market. Or if those in the supply chain become convinced that their costs will really be higher and they need to raise current prices in anticipation of this. So if futures market manipulation influences spot market participants to take real action, then perhaps the futures market manipulation can affect spot prices, and affect the lives of the everyday consumer. At least these have been suggested scenarios.
Any scenario such as this is market manipulation. Of course, at some point prices should return to their supply/demand equilibrium, although it may take a while. Why? Because even if some investors have enough money to artificially drive up prices in the futures market, at some point in the future, buyers will know whether the previously assumed supply and demand conditions are true or not. In addition, if the price was manipulated upward, suppliers may have taken steps to increase production. This may lead to overcapacity, which may well lead to prices lower than they were initially. So this market manipulation can lead to a bubble and burst phenomenon. Some believe this is what happened in the run-up of oil prices from 2004 through mid 2008 and their subsequent crash by the end of 2008.
Others believe that the oil markets performance over the past few years is consistent with efficient markets - markets in equilibrium. Efficient markets can fluctuate wildly. Demand did grow significantly over the last few years, driven primarily by demand in China, India and other Asian countries. Supply has largely kept pace with this demand. For every prediction that the world is running out of oil, there is one discussing the multitude of new discoveries, and how certain large types of fields become economical to build out at current and higher prices. These other predictions point to decades and even centuries of remaining oil even given significant demand growth. And this says nothing of any possible future efficiencies created and conservation efforts undertaken.
A big key here can be what is called elasticity of demand. What is it? It is the ratio of percentage increase in price to the given percentage increase in demand. The higher this ratio, the greater the price change/shock from any given change in demand. This applies in reverse as well, as the rate of a price decline with a decrease in demand. A high ratio is called inelastic demand. It certainly seems that oil fits this definition. A similar statistic can be calculated for supply. Since oil supply is something that can’t be influenced greatly in the short run, and estimates over economic growth and the worlds oil needs are constantly changing, it only stands to reason that the price of oil is very volatile – say those who believe that the oil and commodity markets have been in equilibrium all along.
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