However, the sharp increases and extreme volatility of oil prices have led observers to suggest that some part of the rise in prices reflects a speculative component arising from the activities of traders in the oil markets. How might speculation raise the price of oil?
Simplifying greatly, speculative traders who expect oil to be in increasingly short supply and oil prices to rise in the future can back their hunches with their money by purchasing oil futures contracts on the commodity exchange. Oil futures contracts represent claims to oil to be delivered at a specified price and at a specified date and location in the future.