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Shock, Horror: Oil Prices Have Fallen $10 Per Barrel Since 1 May

From Delta Airlines CEO Richard Anderson writing in Delta’s Sky Magazine (May issue):

“Why do gasoline prices remain stubbornly high? The reason is that the commodity futures markets have become the new stock market for the 21st century. No matter what we do as energy consumers and producers in the United States, there is little direct effect on what we pay for barrels of crude oil.

Passive futures investments on the part of large commodities traders, commodity funds and passive investors have led the oil futures market to become disconnected from the true fundamentals of the market. The increase in the oil futures markets is largely due to speculation, which has undermined the historical relationship between supply and demand on one hand, and oil prices on the other.

Record high fuel prices increase our costs, constrict our flying and ultimately increase the fare you pay. To dampen the speculative inflation of oil prices, we’d like to see rules in place that would limit trading to the companies that actually intend to use the oil they trade. It is clear that market forces are not at work here.”
MP: Where to start?

1. Obviously gas and oil prices don’t “remain stubbornly high,” they remain “stubbornly flexible” or “stubbornly volatile” maybe, but “stubbornly high“?  I don’t think so.  Gas prices at the pump change almost daily, reflecting the reality that they are market-determined, and have been falling now almost daily for the last month. “Stubbornly high” would mean retail gas prices would still be at mid-April peak levels of $3.90 per gallon, but instead they’ve fallen steadily to the current average price of $3.73.

2. Likewise, oil prices are now at year-to-date lows and crude is selling below $96 per barrel for the first time since last December (see chart above).  In just the last 8 trading days, oil has fallen more than $10 per barrel from $106.17 on May 1 to $95.83 in late afternoon trading today.  How can oil prices be “stubbornly high” and yet fall by almost 10% in less than two weeks?

3. And now that oil prices have plummeted 10% in the first two weeks of May, are those price declines due to speculative trading? Or have market fundamentals suddenly re-appeared after disappearing for some time?

Bottom Line: Delta’s CEO should know better, and he can’t have it both ways. If speculators get the blame for rising prices, they should also get the credit for falling prices.  It would be inconsistent to claim that rising oil prices are “disconnected from true market fundamentals” due to speculators, but that falling prices result from market forces?  Do speculators only appear occasionally and create havoc by forcing prices higher, but then disappear when prices are falling?

The logic of the “speculators cause high prices” crowd is so inconsistent and flawed that I think they would have a more convincing case if they instead took the “speculators cause price volatility” position, which is also a refutable and flawed position, but at least it’s plausibly more consistent and convincing. And at least that way the speculators get the credit/blame for falling prices, not just rising prices.