Are hedge funds the real culprit behind oil price volatility?

After all the talk about demand from India and China driving oil prices to $70/barrel and beyond, this item points a finger at hedge funds chasing higher returns from commodities. Evidently there was a widespread expectation that the hurricane season would be as bad or worse than last year, further disrupting supplies. The funds bid up the prices ahead of problem weather that, as we all know, didn't materialize. Now they are all rushing to the exits.

How low might prices go? Conventional wisdom now sees a $50/barrel floor, but “There is always the possibility of a sell-off that could put a fund in trouble,” according to one trader.

Does everyone remember Long-Term Capital Management? Just how bad were the bets made by hedge funds, do you suppose?

Very bad indeed at Amaranth Advisors, which yesterday announced a $3 billion loss from its natural gas positions. Unfortunately, they may have underestimated their problem, according to someone who had a confidential look at their books. Can anyone stop these dominoes from falling?

Look for much greater regulatory scrutiny of hedge funds after the next election. That might take some of the shine off of their slick marketing presentations.