Recent moves in the oil market one suggest that price fluctuations are less and less based on supply and demand dynamics. Saudi Arabia announced yesterday it cut oil production in March and a Saudi oil minister said there was too much supply on the market. One would think these events would push prices higher.
However, prices are down for a second straight day. Brent crude oil traded in London is about $120 per barrel while West Texas oil traded in the States is traded around $107 per barrel, down roughly $3.
Why the drop?
Market pundits claim it's a result of lower risk appetite in response to S&P cutting the U.S. debt outlook. Yahoo economics editor Daniel Gross claims rising Treasury prices in the face of S&P's outlook cut might also signal the market expects fiscal contraction as a result of all the budget and deficit talks.
Either way, it's another sign oil prices no longer really a function of supply and "only financial events will have a price impact," as was the case in the spike and crash of oil prices in 2008-09, says independent oil trade Dan Dicker, author of Oil's Endless Bid.
In the accompanying clip, Dicker says boom-bust cycles are here to stay. "You'll see higher highs and higher lows" and volatility will be the name of the game, he tells Aaron Task and Henry Blodget. "Clearly, the financial players have overrun" the market.
But what about the additional 3 billion capitalists from China, India and other emerging markets that have entered the market? Don't they have an impact on prices, Henry asks?
"For the most part in the past 20 years demand has been met rather easily by supply," claims Dicker. "New reserves, new ways to get at them seem to be going up" with enough frequency that it's hard to prove higher prices are a result of a lack of supply.