ANDREW LEBOW: If I'm worried that the price of oil in that boat is going to go down, then I am going to want to sell futures in order to protect against my downside.
PAUL SOLMAN: The downside that the price will sink by, say, $5 a barrel to $71 before the boat docks. With a million barrels, that would cost him $5 million. But on the futures market, he can make a side bet, which will pay him the difference between $76 and the lower price -- in our made-up example, $71 -- the price on the day his ship comes in. So he locks in $76 with this so-called futures contract.
ANDREW LEBOW: And if the price goes down, I'm going to profit on the futures markets. If the price goes up, I'm going to lose money on the futures, but my physical barrel is going to be higher.
PAUL SOLMAN: So Lebow would be hedging, protecting the price of the physical oil he's already paid for. But, of course, he can only buy oil at a price in the future if someone's willing to sell at that price.
And that's why there's a futures market: the NYMEX, the New York Mercantile Exchange, where traders like those in the pit match up orders from oil suppliers and users with investors and speculators willing to take risks. What's new these days is the flood of investment and speculation money flowing through this floor.
Half of Man Financial's trades are done for oil users and suppliers, called commercials. They phone folks like Lebow; he relays their trades to the Man men on the floor, the ones in blue and red jackets.
But the other half of Man Financial's clients are now investors and short-term speculators, who've jammed an extra $100 billion into the market in just the past few years, often investing your and my money via mutual funds. Some think these investors are driving up the price, but not Lebow.
ANDREW LEBOW: Ultimately, the price will respond to supply and demand. And speculators don't control supply and demand; the commercials do, and the end users do, and governments do.
PAUL SOLMAN: Ultimately. But what about now, with the Middle East again in flames right there on TV? Dave Shapiro had been on the desk for 16 hours straight.
Are investors and speculators driving these huge swings?
DAVID SHAPIRO, Man Financial: Oh, without question.
PAUL SOLMAN: Economic theory says the more investors in a market, the more stable it is. Shapiro doesn't see that these days in oil.
DAVID SHAPIRO: Any time you get a piece of news like this, that is a market-moving piece of news, these moves get exaggerated because people are like, "I've got to get out. I've got to get out, and, you know, damn the price." And they'll just sell into it, if they feel they have to get out. If they sell it hard now, and they think it's going to go down another dollar in the course of a day, they'll hit it hard now and, you know, damn prices. "I got to cover my positions."
PAUL SOLMAN: What do investors themselves say? Eric Bolling, tossing a completed trade into the pit, makes side bets for his own account, based on, among other factors, geopolitics. But though a rocket had just hit Haifa in Israel, neither he nor the market took much notice.
ERIC BOLLING, Energy Trader: Although terrible, a building hit in Haifa has really no impact on the price of oil. There's no oil in Haifa; there's no production, per se.
Iran produces probably in the top-four producing nations in the world. They produce oil that the world needs, and it's such a tight supply-and-demand situation going on right now that any sort of supply disruption from the Iranians would cause prices to spike.