Economist John Hussman is predicting that plummeting demand from a weakened economy and an unwinding of long speculative positions on crude may bring oil back down to $60 by early next year. Unlike the majority of his peers, Hussman believes that speculators and hedgers do play a role in forcing prices upward. When speculators buy up contracts for future delivery, at higher and higher prices, argues Hussman, they crowd out purchases by hedgers, who actually do intend to take delivery of the physical product. Hussman:
It doesn't matter that the speculator has no intent to take delivery (of the physical product). What matters is that if the speculators are unbalanced on one side, the producers will have satisfied their need to pledge future delivery. Moreover, because they can lock in a high price, they will be inclined to sell more for future delivery than they otherwise would. Meanwhile bona-fide hedgers will be inclined to buy less on the forward market than they otherwise would.
Hussman concludes that after commodity bubble collapse, speculators will unwind their positions, and prices will plummet.
In my view, the problem will emerge a few months from now, as a) economic demand softens further, b) planned production hikes actually emerge, and c) weakening price momentum encourages speculators to close long positions instead of rolling them forward. At that point, I expect that net speculative positions will plunge by 10-15% of open interest and we'll see a sudden glut on the market for spot delivery. It should not be surprising if this speculative unwinding takes the price of crude below $60 a barrel by early next year.
Sound too good to be true? It probably is. Maybe speculators do affect prices of the physical product in the circuitous manner that Hussman describes. But even if they are pushing prices up, they're certainly not the only thing doing so; we've complied a handy list of the real villans here.
