The recent run up in oil prices and gas prices has politicians and some misguided analysts blaming speculators for the higher price. Well the truth is that speculators, by their active participation in the market place, actually kept prices lower. Despite the surge in hedge fund participation last week, oil prices seemed to have topped out short term and we saw the price pull back. You see the reason why oil prices did not go to $120 a barrel and gas to $4.00 a gallon is because speculators assumed the greatest risk to global oil supply since the absence of that sweet Libyan crude. We have had Europe embargo Iranian oil and then Iran embargoed them back. We have worried countries in Europe and Asia scrambling for real barrels of oil and hoarding it in case they get cut off if there is a war. The only thing that may slow that process is the higher price. The higher price starts to ration supply so that indeed if there is a cut off in supply, there will be enough oil to go around. If prices stayed low then someone might try to buy a big chunk of supply and hold it off the market. This in turn could create shortages and tensions between the haves and have-nots.

You see if you can read a chart, many times you can tell what the market is thinking. It was clear that if the risk of war increased in Iran, then oil could hit somewhere near $110. We saw that risk go up when talks with the International Atomic Energy Agency failed and reports that Iran has tripled their uranium enrichment program. Now that we have hit that level prices have eased off. If there were not speculators to assume that risk, the consequences might have been dire. What is panic buying of real supply and real barrels could turn into stampede of hoarding removing supply from the marketplace.

Not only is that due to speculators it makes the oil price discovery better than it has ever been. The introduction of high frequency traders has allowed the floor quick and accurate executions of orders. No more waiting for minutes or hours to find out exactly where you stand in the marketplace.

Pipeline triangulation. It seems some pipelines are more political correct than others. Yesterday it we heard that TransCanada Corp. will expedite the Cushing, Oklahoma supply to the refineries in the U.S. Gulf Coast part of the Keystone XL oil pipeline. The Whitehouse applauded the measure because for once the pipeline does not cross the border and they had no responsibility for the pipeline and at the same time they can claim they voted against the pipeline before they voted against it! That way the President can talk out of both sides of his mouth on the issue of jobs and the environment. Of course we all know that the pipeline will get built so if you are a die hard environmentalist you should feel a bit used.

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_________________________ Phil Flynn Research Division 806 W. Washington Blvd. Chicago, IL 60634 312 563-8344 / 800 935 6487

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