Now this article has some very sobering statistics on how the Futures Market have changed in the past 5 years. The market used to be 70% legitimate hedgers.
That's not our present world, though. Today roughly 30% of market participants on the New York Mercantile Exchange (NYMEX) are identifiable hedgers with a legitimate business purpose. That fact and a twenty-fold increase in capital flowing towards commodity futures during the past five years - growing at a rate of $1 billion in contracts per day - point to a remarkable shift in how futures prices get set, by virtue of who's around to set them.
Today the number of paper oil barrels traded daily on NYMEX (and that's just the most regulated exchange) is over three times the number of physical barrels consumed daily worldwide.
Supply and demand of the physical product, by and large, has remained fairly stable. In 2005, global oil production was 84.6 million barrels per day, and consumption was 83.6 million. Today, those numbers are 86.5 million and 86.4 million.
So supply and demand in actual oil is about equal, only 30% of the market are legitimate hedgers that need the market to protect their prices going forward, and billions of dollars of liquidity is chasing fewer barrels of actual oil. No wonder prices have tripled.
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