Monday, June 2, 2008

The May Surge in Oil Prices

Oil has been on the rise for some time now, but in May it accelerated a bit, up about 15% for the month. What happened? Did demand suddenly spike? Did supply drop? Was there manipulation?

Actually, I believe I put my finger on it this morning as I watched a commercial for $2.99 gas, guaranteed for three years when you buy certain new cars. If I were a CFO for a car company considering making such an offer, what would I do? Well, you may be on the hook for some big losses if gas continues to go sky high. But, you can offset that potential expense by buying oil and gas futures. I suspect that the car makers went to the market before and during this promotion and purchased as many oil and gas contracts as they felt they needed, to hedge against losses due to the offer. Smarter speculators than me would have realized this much earlier on and taken advantage by increasing their own positions, so you get a short term spike in demand and prices.

The good news is that given the behavior of oil prices in recent days, it looks like they're close to meeting their reserve requirements.

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