Speculation not to blame for oil - report

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Oil: Speculation or demand?

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NEW YORK (CNNMoney.com) -- An influential oil-policy group released a report Tuesday arguing that the increase in oil-market speculation is not driving up crude prices. But the study far from ends the debate.

Since 2003, the volume of investment funds in commodity markets - especially oil - rose from about $15 billion to $260 billion, according to the International Energy Agency (IEA), which issued the report.

And many argue that all that extra money sloshing around is to blame for prices doubling from $71 last July to roughly $140 today.

The IEA isn't buying it.

"There is little evidence that large investment flows into the futures market are causing an imbalance between supply and demand, and are therefore contributing to high oil prices," the report said.

Instead, the IEA put the blame for higher crude prices squarely on strong growth in demand coupled with limited growth in supply.

"If supply is constrained and demand is increasing, prices have to rise," read the report.

The IEA argues that if speculation drives prices too high, the market would be unbalanced. Either demand would fall off, or stockpiles would rise. Neither has happened.

In fact, global demand for oil products has surpassed supply in every quarter since the fourth quarter of 2006, according to the U.S. Energy Information Administration.

Fast-growing economies like China and India are consuming more and more oil. Meanwhile, it's difficult for oil-producing countries to quickly ramp up output.

The IEA also made the argument that many commodities - such as coal and rice - are showing similar price increases, even those without the possibility of speculation.

Representatives of oil traders agree that supply and demand rules the market, not investors.

"The factor that fundamentally affects the price of a commodity is the availability and demand for it," said Greg Zerzan, the head of global public policy for the International Swaps and Derivatives Association. The trading price "merely reflects the expectation of the movement of the price of oil."

Furthermore, even if more speculators believe the price of crude will go up than those who think it will come down, they still have to find a buyer at the price they want to sell it, said Zerzan.

The IEA report is just the latest of several recent reports that downplay the role of speculators.

However, several respected analysts testified before Congress last week and argued that investor money at least in part raises the price.

Even analysts who concede the laws of supply and demand are the most significant say that speculation can make price swings more volatile - and that's what's going on now, they say.

"The fundamentals have been fairly firm, but speculation exacerbates the trends," said Tom Kloza, chief oil analyst with the Oil Price Information Service. "More and more money is going into buy-and-hold contracts that simply buy and roll into the next month."

If speculators simply buy and hold oil contracts, then they are not reflecting the current supply and demand.

"We need speculators who buy and sell... and sell, and buy, and buy, and sell," said Peter Beutel, an oil analyst with Cameron Hanover.