Bubbles and oil

Business Week carried an interesting piece regarding the trading of oil futures on the commodities markets.

New players are helping to push up the volume of crude-oil contracts traded on the New York Mercantile Exchange (Nymex). Such trades are on their way to an all-time record this year, up 13% through July. Data from the Commodity Futures Trading Commission (CFTC) show that the amount of money flowing into commodity funds -- many of which include a good chunk of oil investments -- has surged whenever the stock market has swooned over the past five years. Today, there are more than 3,200 funds registered with the cftc, almost twice the number in 1999.

Regardless of the long-term prospects for oil prices, given the potential for risk to be overestimated and the impact of consensus on pricing, the elements are in place for a price bubble in the short-term.

An unstated implication is that low interest rates are also behind the push towards commodities as an alternate means of increasing returns over the more traditional balancing act between stocks and bonds.