speculation.

enlightening article here. quote:

What made the oil market speculation possible was legislation passed in the waning days of the Clinton administration. At the behest of energy-trading companies like Enron, a shadow electronic trading system was created that allowed speculators to trade oil futures contracts beyond the regulatory oversight of the Commodities Future Trading Commission. The CFTC is empowered to establish trading limits ‘‘as the Commission finds are necessary to diminish, eliminate, or prevent” the “burden” arising from speculation. Because the CFTC can’t track much of the oil trading now, it can’t stop the speculation. A U.S. Senate subcommittee report from June 2006 squarely blamed speculators for much of the rise in oil prices, estimating more than $60 billion had poured into the markets at that point.

The report noted that even as oil prices were rising, so were oil inventories because suppliers were gambling they could get more money down the road. The same exact thing occurred earlier this year. Crude oil prices zoomed nearly $20 a barrel in January and February. But in eight of nine weeks, U.S. oil inventories increased to multi-year highs. Tyson Slocum, director of Public Citizen’s Energy Program, explains how it works: “You’ve got hundreds of parties entering into an electronic format to exchange massive volumes of crude oil and gasoline and natural gas and electric power and coal and ethanol and whatever else they want to do. And it’s all unregulated.” The players, says Slocum, include, “Goldman Sachs, Morgan Stanley, Merrill Lynch, Citigroup and a huge host of hedge funds. Deutsche Bank, Credit Suisse, UBS—all the big investment banks. The big oil companies that are traders are BP, Shell, and Marathon. Exxon Mobil really is not a big trader.”

There are some “legitimate supply-demand issues that are driving prices up,” he says. But “supply and demand does not justify the level of prices that we are seeing right now. I think that has to do with the increased level of trading volume, volatility and speculation that is represented by a lot of these new players.” Slocum adds that because we “lack any effective transparency…that marketplace has an invitation to engage in anti-competitive behavior—colluding, rigging bets, price fixing.”

It’s hard to say if agricultural commodities markets are being manipulated, but there appears to be naked profiteering. For one, at the Chicago Board of Trade, there has been a big leap in electronic trading. The volume of wheat and oat contracts in the electronic arena (as opposed to the classic “open pit” where traders physically meet) has increased by more than 130 percent in 2008 so far, while rice contracts have ballooned by 219 percent. Patel says he thinks that “hedge funds and grain-trading divisions of the large agribusinesses are making a ton of cash, like Cargill and Archer Daniels Midland.”