Quote Originally Posted by dragonrider
Some people are claiming that there is a $60 dollar premium on the current price of a barrel because of speculation. Even oil producers are saying that. So that does not make sense to me. If it curently costs say $50 to make a barrel, and a producer can sell it for $60 and make money, then if that producer's competitor says to a customer "I'm charging $120 based on futures speculation," that first producer would jump in and say, "Holy crap! A $60 premuim for speculation! Screw that! I'll GLADLY sell you all the oil you can take for $70 and still make DOUBLE what I usually make!" The current spot market should correct and track a lot more closely to supply and demand than to allow such a huge markup based on futures speculation. It would seem like the only way you're going to make money in futures is to know what the price really is going to be. I mean it does you no good at all to agree to buy a barrel at $130 next year if the price is really going to be $60. Unless this really is a true bubble and people are just passing the overpriced contracts on to bigger and bigger suckers, until the bubble pops, and someone is left holding a poisonous 130-dollar contract to buy 60-dollar oil.
Oil futures used to be a risky market for this reason. However the trend by speculators it's being less treated as a commodity and more like an asset class. If someone ever bought oil at $60, it would only be involving the first trade. Oil futures and sold multiple times before it's even used.

As the physical price goes up, let's say Seller A is holding a bunch of contracts for the value of $60 an oil. Now the actual oil price keeps climbing. Those contracts become more valuable as oil is in demand. Let's say Buyer A see $70 a barrel an oil as a bargain. Seller A sells it to buyer A for $70 making $10 a barrel himself. The price keep climbing because there's no news of increase supply, OPEC implemented a price increase, it becomes more attractive to investors. Then Buyer A will sell to buyer B for a little more each time, being traded over and over again. That's how the price is drived up.

Now how does drilling off-shore lower oil futures and the physical price of a barrel of oil? It's the creation of new contracts. You are injecting supply into a market with very limited supply. No one can get oil futures unless the seller is willing to sell them.