The idea that oil may be priced too high has started to hit the masses, through the media and through the photosphere.  I think now it has been decided that oil is indeed built largely on speculation and its price the product of highly leveraged futures accounts.  Now that the price is up and many billionaires made on the energy bubble, it might be time that the tides turn to lower energy prices and a short term grasp for air when the pump reads $3.20 instead of $4.00.

This week showed a lot about the speculative impact in oil trading.  Simply on news that one (1) Merril Lynch analyst suggested $150 oil by July 4 pushed oil up $11 in one trading day.  A mere suggestion was enough to send prices up almost 9% in one day, the last time this happened Yahoo was $120 a share with the internet bubble in full swing.

Had this market been dictated just by supply and demand, the price of oil would barely move on the day to day.  An analyst prediction wouldn’t have sent the price to meet the predicted amount, instead the price would stay moderate.  Higher demand or a lower supply should be the only thing affecting price, but the problem comes in that demand isn’t for the use of oil, instead its for the holding of oil.  All the speculators that have locked up supply will unleash it when the price drops, adding even more supply to a falling market.  If it all works out the way it should, where net buyers start liquidating their positions,  the price of oil should drop by as much as 30%.

Markets work so perfectly in a market where people buy for consumption rather than speculation.  The trader with Goldman Sachs has no use for 100,000 barrels.  They won’t even use that in their lifetime, they will though hold that supply so that no one else can use it and drive up the price.  This is what we’re seeing now, so much oil and oil futures are held by investors instead of the typical clientele: airlines, delivery companies, gas stations.

Even oil billionaires are dumping their investments.  Richard Rainwater, the billionaire oilman made a $2 Billion fortune on a $300 Million investment in the 1990s.  Recently he dumped all of his shares, every single oil firm that he held was sold, for the express reason that he thought oil was a bubble.  This comes from a man that has made almost every penny he has from oil and investing.

One name that never seemed to get on the energy train is Warren Buffett.  He’s known for avoiding bubbles and eventually making the right calls, now it appears that he might have gotten around another bubble.  This market is set for correction to the supply/demand efficiency level that is from consumption not from speculation.  We’ll have to wait for the summer predictions to slow before we see any drop in prices, from the consumer side, lets hope it comes quickly.