For the past few years, we have noted that ballooning capital flows into commodities have caused a momentum unto itself frequently at odds with fundamental concepts of end use supply and demand. Hedge funds, commodity-based-exchange traded funds and institutions looking for alternative investments to under-performing equities the past 10 years have become a price force on to themselves. This can present real challenge to those of us who are trying to follow rational investment process. Investment-momentum-money is fickle, largely trend-following and often irrational. It typically buys just to buy and sells in panic.
This article on oil makes the point well: see Oil should be around $10 a barrel: Annalyst :
The price of a barrel of oil would be closer to $10 if the commodity wasn't traded as an investment instrument, given the record-high levels of U.S. oil inventories, Peter Beutel, president of Cameron Hanover, told CNBC Monday.
“I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn't be anywhere near where it is,” Beutel said.
“We have so much oil right now, more than we've had in 27 years. Why is it 27 years? Because that's how far our records go back. It's probably the most in 50 or 100 years,” he added.
Higher prices the past few years have encouraged the usual response: much higher exploration, innovation and production, ballooning world supply. Passionate arguments aside, the price of oil today makes no mathematical sense in the lower demand world of the post-credit-bubble economy.