Oil Below $80: Where Have All the Speculators Gone?

The price of crude oil has fallen more than 20% in three months, from $106 in March to below $80 per barrel on the NYMEX as of June 21, 2012.  On the minus side, the rapid fall indicates a pronounced and sudden weakening in the world economy.  As nations and businesses slow down, less oil is consumed and the price falls; oil is a pretty good indicator of economic health.  On the plus side, every dollar fall in the price of oil translates to an extra $20 million a day or so back in the pockets of U.S. consumers.  It is hard to imagine a faster and more targeted economic stimulus plan, and the federal government didn't need 60 Senators' votes to make it happen.

Such a dramatic price decline after a relatively stable period of $100 oil may teach us some important lessons about the market structure of listed energy contracts.  Oil is a volatile commodity, and a volatile investment should one look at tracking its price as part of a portfolio.  Oil surpasses almost all, if not all, financially traded products in normal volatility.

While the question gets asked in times of rising prices whether rising oil prices are caused by artificial factors like "excess" speculation, you rarely hear the regulators and pundits who complain of artificially high prices discuss whether lower prices are also caused by excessive speculation.  In fact, in cases of falling energy prices I have never heard the claim that they were the direct result of speculation.

I spent over 20 years as an attorney and operations officer of the NYMEX, and I have no better idea why prices go up than saying "more buyers than sellers."  What I find hard to believe is that speculators cause high prices but supply and demand causes lower prices. That just seems silly.

The point is, why do the advocates of strong position limits and intrusive controls on market participants not emerge when prices fall to explain how speculators affect pricing?  I say that speculators have the same role they always have: providing liquidity. I'll say that at $100 or $70.  Not just $70.