Forget the Fundamentals When It Comes to Oil

The bottom line has been clear to me -- speculation has been the key driver of the oil market for the past two years and will continue to be the single most important factor going forward. As crude makes new highs seemingly every day, figuring out why this destructive rally inexorably continues becomes almost more important than the rally itself.

I hope that cold-bloodedly parsing the true causes for this rally will give us the insight to predict how high oil might go and even more, how oil will trade going forward. As a floor trader of oil for 25 years, I have, I believe, a unique perspective on this rally -- after all, I was immersed in this market, almost exclusively, every day of my trading life.

I'm going to draw on that experience to "prove" to you how this market has entirely changed from the days when I traded it using fundamental ideas as predictive tools to now when the market moves almost without rhyme or reason merely on the waves of speculative money meeting the market.

Oil's All About Speculation

A lot of the points I'm going to make I've made in previous columns over the past year, but as oil nears $120 a barrel and validates my predictions about speculative action in the crude market, now would be a good time to put together all of the ideas in one column. By combining them all, perhaps, we can cobble together a thesis for the next several months. So here, in no particular order, are the arguments and proofs of "speculative oil."

The Growth Factor

First, the growth of commodities as an asset class is unprecedented. We need no litany of numbers to prove this point. We can merely look at the volume numbers being posted by all the major commodity exchanges over the last few years.

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At the time of publication, Dicker had no positions in the stocks mentioned, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.