The recent oil rally reminds of the oil price spikes from 2007/08 and 2011-14. Both were caused by speculators. Hedge funds and others were betting on supply disruptions cause by political conflicts.
The oil price does not represent physical supply & demand for oil. Oil is priced on financial markets. Hedge funds and other speculators purchase futures (financial contracts on the delivery of oil in the future) which represent the oil price. Below you can see the chart for the future on Brent Crude, the international traded type of oil.
Herding Behavior
The triplication of the oil price since 2016 is only partly caused by rising physical demand for oil and production cuts by the OPEC members. Both movements are partly compensated by the rising US oil production - mainly by fracking. The sharp price gains are aggravated by speculators. The recent speculation wave into oil is fueled by bets that new US sanctions against Iran will disrupt global oil supply. These speculators ignore that China will not participate and will be happy to purchase cheap Iranian oil. And it does`t look like that Europe will continue purchasing oil from Iran as well, so that the US sanctions won´t harm the global oil supply.
History shows that oil price rallies attract speculators, including hedge funds, who purchase oil futures on the financial markets as a bet on further price gains, the so-called momentum players. Their herding behavior causes snow ball effects like the oil price spike of 2008 and the recent rally.
But history also shows that spiking oil prices induce more drilling because more & more oil wells are getting profitable. The higher the oil prices will climb the larger is the possibility that the new bubble will burst.
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