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From the point of view of fundamental investment analysis, there are good reasons to continue to bet on further increases in commodities prices. Resources are becoming scarcer, while global demand for energy, mineral resources like copper and coal and crops like wheat and corn will continue to rise. Traders on the commodities exchanges call it a "supercycle" -- a trend that will continue for a long time.
The problem is that commodities don't behave like stocks or mortgages, the last two darlings of the investment community. It is often the case that many fund managers cannot (or choose not to) understand the specific rules of their latest toy on more than a superficial level. They trade in pieces of information that mean nothing until they are in possession of one of them.
Sometimes all it takes is a heavy rainstorm in Iowa to trigger a rally on the corn market. A poor harvest could reduce supply. Less supply drives up prices -- and higher returns for commodities traders.
In the case of oil, a foggy day in Houston's harbor is enough to trigger a panic in the market because it means that a few tankers will be unable to unload their cargos until the fog lifts. When a pipeline burst in Canada, "the price immediately jumped by $4," says Fadel Gheit, an oil analyst with Oppenheimer in New York with 20 years of experience in the industry. Gheit, also an engineer, knows how pipelines are repaired. "This isn't heart surgery. It's a plumber's job, child's play, finished in three days," he says. "The traders use every excuse in the book to drive up prices."
As a young man, Gheit was still analyzing oil prices at $4 a barrel. The ritualized relationship between production volume and consumption, demand that has been growing for years in China, unrest in the Middle East or Nigeria, the threat of cold snaps -- none of this is enough to explain the current price explosion, says Gheit. In fact, he is convinced that speculators are completely responsible. "It's pure hysteria," he says.
Other analysts agree. "The market is reacting to the fact that we might not have enough oil in the market 13 years from now -- excuse me?," says Edward Morse, chief energy economist at the investment bank Lehman Brothers. "You never recognize it's a bubble until the bubble is over." he says.
Signs of unusual behavior abound across the commodities markets. Take cotton, for example. In late February, the price of cotton futures jumped by 50 percent within two weeks. But cotton farmers haven't even been able to sell half of their harvest from the previous year yet. Warehouses in the United States are fuller than they have been since 1966. Indeed, all signs point to a price decline.
In a statement to the US Congress, the American Cotton Shippers' Association blames this "irrational" development on "speculators driving up prices." According to the trade group, cotton processors would never pay the fantasy prices being quoted on the commodities futures exchanges.
Two worlds have developed. One is the world of the traders at hedge funds and investment companies, and the other is that of farmers, grain dealers and mine operators. They may be dealing in the same commodities -- barrels of oil or bales of cotton, for example -- but for some these are nothing but abstract concepts while others see them as down-to-earth products.
The problems arise when these two worlds intersect, the fantasy world of speculators and the real economies of cotton processors and coffee roasters. It leads to distortions, like those currently affecting the cotton market.
Re: $140+ per barrel - the end of the world as we know it?
One of the advantages of living on a mountain of oil is that things like this only makes me smileWe're looking at a diminshing EROEI (energy return on energy invested) as newer finds are in deeper water, further from land, or harder to crack. Tar sands have an EROEI as low as 1.5:1, shales are technically difficult. Basically the new reserves aren't a like-for-like replacement of sweet Saudi crude, and that has to eat into the 0.3%.
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, low dollar value and the unrest in Iran or Nigeria (yeah some fear that they won't produce as much as they have promised), that cause the price pr barrel to be as high as it is. I won't buy the reason about there being too little oil to go around. 
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