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No Big Surprise: Speculation Continues to Drive Up Heating Oil Prices

October 28, 2010

It is somewhat frustrating reality that the price of heating oil and other energy commodities are strongly influenced by investors playing the commodities market. Although commodities exchanges were originally created to help producers and buyers of certain products (like farmers and heating oil dealers, for example) hedge their risks in the case of unexpected price moves, they have become a major venue for financial investors (speculators) looking for profits. Through the sheer volume of money spent and contracts traded, hedge funds, pension funds, and investment banks influence the price of commodities like heating oil. And while aggressive buying and driving up the price of heating oil by eight cents in one day may be a profitable enterprise for speculative investors, its effect on heating oil dealers and users is anything but.

The Eagle-Tribune of North Andover, MA revisited the issue of speculators driving up heating oil prices on Monday, reminding heating oil users that sudden price increases are (usually) not the fault of dealers. Heating oil industry voice Michael Ferrante, president of the Massachusetts Oil Heat Council, summed up the situation to the Eagle-Tribune:

It’s frustrating for consumers and our industry. Speculators in the market are prognosticating on where things will go. Why? So they can earn money. Most of those who speculate about heating oil have an investment in heating oil. They buy heating oil contracts, and that drives the price up, then they sell those contracts.

No doubt commodities traders and exchange executives would take issue with Ferrante’s assessment, as they continue to defend speculation as a necessary activity that does not exert undue influence on oil or other commodity prices. While there is little conclusive evidence to support the belief that speculation alone can cause spikes in oil prices, situations in which supply and demand factors point to flat or falling prices and prices rise sharply give strong anecdotal support to the claim. Such a situation exists right now—the US and other developed nations possess more-than-ample supplies of crude and heating oil, and struggling economies are keeping demand in check. But those fundamental factors didn’t stop the price of heating oil from gaining a few cents this week or jumping up eight cents in a single day last week.

As the commodities market becomes less of a place for producers and wholesale buyers and more dominated by speculators, financial factors have increased their sway over prices along with speculation itself. The value of the US dollar and the performance of US stock markets now have as much, if not more, influence over oil prices than do fundamentals.

As unfortunate as speculators’ influence on heating oil prices may be, there’s not much heating oil dealers or consumers can do about it. The financial reform law that passed this summer does provide for stricter oversight of speculation on energy commodities, but the exact rules are still being hashed out by the regulatory agency, the Commodities Futures Trading Commission, and may not take effect for a year or more.

With the actions of speculators and the agendas of government agencies out of the control of heating oil customers, the best way to save money, as the Eagle-Tribune reminds its readers, is to conserve the fuel though simple measures like turning down the thermostat and weatherizing your home.

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National Oilheat Research Alliance ECC is funded in part through the National Oilheat Research Alliance.