Also you would never do such a trade because the net before costs is zero.

You would want to buy oil contracts at $65 and sell the other contracts at $70.

It doesn't work that way. They would sell their oil contracts at a loss because they don't want to take delivery of the oil.

The Sunday Times September 12, 2004

SPECIAL REPORT

Speculators hijack oil market
Prices have been forced up unnecessarily as investment banks and hedge funds join the ‘black gold rush’. Robert Winnett reports
A LARGE WAREHOUSE in Amsterdam may seem an unusual place to attract the City’s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property — oil.

This and the tankers that have been hired by the investment bank illustrate just how important oil is now becoming in the City of London and Wall Street.
[...]

They don't have to use those prices they can sell below! If they did the price would start dropping fast because the futures would start to drop!

The shippers would buy all the oil they could take if it was below market.

Then they would need to unload it which means they would need to drop the price. The reason the cartel worked was the Saudis could regulate the price by controlling their production by unloading their oil.

They like the current price so they cut back. Kiss principle.

And to think that Saudi Arabia recently scaled back its oil production from the 9.5Mbpd (steady output of the past 2 yr) down to 9.1Mbpd (-400,000 barrels per day), citing "lack of buyers" (for light sweet oil too) from OPEC producers.

OPEC has been citing lack of demand for physical "wet barrels" for the past 2 yr.

The oil pricing mechanism is broken and the quicker people wake up the less additional damage will be inflicted, due to this massive wealth transfer.

Read more:

http://dhatz.blogspot.com/2006/06/oil-to-38657-per-barrel.html

That's an interesting article and I'm sure this is temporarily part of the pricing picture. But commodities futures markets are notorious for disasters. for one thing, most commodity future contracts are set up on a 10% deposit basis. That means that most speculating players are levering 10:1 speculations on the market. When the shakeup comes nearly all of them (except for the arbitrageurs) go bust.

Most of the actual arbitrage players are not speculators, but rather businesses who seek to hedge against violent price changes in a commodity that affects their business costs. It's a bit like buying insurance. (See the wikipedia link below).

http://en.wikipedia.org/wiki/Arbitrage

So, what I'm saying is: the speculation that you're seeing is a game of musical chairs. All the action in futures takes place some time before the actual delivery date, because the speculators don't want to be stuck actually having to take delivery of the "wet" goods and must sell as the contract expiry date nears.

When the large players decide the timing is right, the price will plummet like a missile diving down. Like all speculative bubbles, it cannot last for long.

But the artificial bottleneck created by the oil refinery companies to maintain scarcity of supply is a structural, more lasting problem, imho.

The problem is these countries already have enough money so they would rather slow production than drop the price to get it sold. They can find buyers if they would just drop the price.

The Danger of Speculation
Commentary by Mike Norman for FOX Fan Central

Mike Norman
It’s time to speak the truth. No more disingenuous questioning and wondering. No more exasperated resignation. We know the reason why oil prices are high, and it’s time to admit it and do something about it.

Oil prices are high because of speculation, pure and simple. That’s not an assertion, that’s a fact. Yet rather than attack the speculation and rid ourselves of the problem, we flail away at the symptoms. High gasoline prices? Oh, let’s use hybrid cars, or drill in the Rockies or off the California coast. How about doubling the use of ethanol, even though it costs more to produce than the energy you get out of it? Then again, we can go to Alaska, or build more refineries, or triple the number of nuclear power plants. Sound good?

What if we just stopped the speculation?

No, you can’t do that! That would be interfering with the “free” market.

Hey, the “free” market is starting to get awfully expensive.

Tell me, how is it free when speculators rule the roost? It’s one thing when they do what they do with pieces of paper called stocks, but it’s another when they do it with a vital commodity like oil. We saw the devastation their behavior wrought in the 1990s, and we’re witnessing it again right now.

In an interview after a meeting here of the Organization of Petroleum Exporting Countries, Ali Naimi said other cartel members are having trouble finding buyers for all the crude they are producing, at a time when global stores are near full and many refiners have closed facilities for routine maintenance. One Saudi official said an estimated three million barrels a day of refining capacity is out of action and unable to process crude, at a time when the world is using some 84 million barrels a day of oil products like gasoline and jet fuel.

"It's not just heavy oil. Even light oil is having problems" finding buyers, Mr. Naimi said, referring to premium grades of crude known as light crude that are highly prized by refiners because they have high gasoline yields.

OPEC Offers an Extra 2M Barrels of Oil
2005-09-21 11:18:40 AP
Ministers of the OPEC agreed here on Tuesday to provide an extra two million barrels of crude oil a day in a bid to calm down the world oil market.

VIENNA, Austria-OPEC offered world markets an extra 2 million barrels of oil a day � its entire spare capacity � on Tuesday in an attempt to show that supply fears were unfounded even with traders eyeing another hurricane approaching the Gulf of Mexico.

The cartel, which has come under international pressure over the near-record prices that followed Hurricane Katrina, said its output ceiling would remain at 28 million barrels a day and stressed that the main obstacle is refining capability, not a shortage of crude.

"If you have a buyer, bring him, we'll give him the 2 million. We have the availability to provide it," said OPEC President Sheik Ahmed Fahd Al Ahmed Al Sabah, who is also Kuwait's oil minister.

Friday, 22 September, 2000, 09:13 GMT 10:13 UK
Oil: New rules of the trading game
Market speculators using sophisticated financial instruments are having an increasing influence on oil prices.

The secretary general of the Organisation of Petroleum Exporting Countries (Opec), Rilwanu Lukman, says the world oil market is held captive by the derivatives markets. The old rules of supply and demand have been distorted, he says, by the creation of what he calls "paper barrels" of oil.

Opec president Ali Rodriguez says that at least $8 of the oil price is due to speculation.

They are both articulating the anxiety at the loss of control felt by the Opec oil producers. They can no longer manipulate the market mechanisms that have made them lots of money recently, but which no longer respond to the old fashioned rules they prefer.

Thus, says Mr Lukman - and he should know - the time has long gone when the complex trading systems that are responsible for moving oil around the world from producer to consumer were only governed by the rules of supply and demand.

Mr Lukman was for many years Nigeria's oil minister and representative at Opec, and as one of the organisation's oldest hands, has watched the oil market closely for almost three decades.