[Peakoil] Falling Oil Prices: Again, Blame Speculators

[Keith Thomas]

The following is the best explanation I have seen so far of the current  
low oil prices, even though it's written by Americans for Americans as  
if they were the world's only oil consuming nation.

I wonder what Qantas are doing now. Back in early 2008 they bought oil  
futures for about a year's consumption at around $73 barrel and this  
price netted them a commercial advantage over other airlines that did  
not buy so far ahead. But from October, when oil prices fell below that  
level, less far-thinking carriers would have been better placed.
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Keith Thomas
www.evfit.com
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op News January 8, 2009, 3:53PM EST text size: TT
Falling Oil Prices: Again, Blame Speculators

http://www.businessweek.com/print/bwdaily/dnflash/content/jan2009/ 
db2009018_370800.htm

Hedge funds and other speculators have had a hand in oil's price  
decline, just as they did in its rise. But don't expect congressional  
hearings now

By Steve LeVine

When oil prices soared to a peak of $147 a barrel last summer, oil  
speculators became the whipping boy from Main Street to Congress.  
Critics demanded that regulators rein in hedge funds, pension funds,  
college endowments, and other investors that had piled into oil futures  
in a quest for easy profits. But the protests have died away now that  
prices have plunged by $100. "You don't hold Senate hearings when oil  
prices are low," says Joel Fingerman, managing partner of Chicago-based  
Fundamental Analytics, a commodities analysis firm. "There's no  
political mileage to be gained."

But just as the stampede of nontraditional investors into the oil  
futures market helped to push prices up, their exit has had a hand in  
bringing them down. Many hedge funds and institutional investors have  
unwound losing positions or have been forced to sell to meet margin  
calls elsewhere in their portfolio, analysts say. Noncommercial  
traders—mainly investors who never take actual delivery of  
crude—reduced their long futures bets on the New York Mercantile  
Exchange by about a fifth over the seven-month period ending in  
December, from 266,733 in May to 215,665 as of Dec. 22, according to  
Nymex figures.

"The new speculators—those who were caught up in a herding mentality  
and helped to cause the bubble trouble—have exerted added momentum to  
the swift price declines," says Bart Chilton, a commissioner with the  
U.S. Commodities Futures Trading Commission, which regulates oil  
trading.

Speculators Went Long

True, it was the global recession that dramatically accelerated the  
slide in petroleum prices. And some of the speculators got out in time  
to cash in winnings.

The exodus began last spring, when crude prices soared past $110 a  
barrel. Unlike oil traders who can be long or short, or sometimes both,  
in a single day, the newcomers to the market had taken uniformly long  
positions—that is, they were betting oil prices would continue to go  
up. When the financial crisis began to worsen, many of these investors  
stopped rolling over their positions when contracts expired, thus  
removing a crucial underpinning to higher prices. Nymex data show that  
among noncommercial traders, the number of long positions still exceeds  
the shorts. But analysts don't know if this is intentional or whether  
some are simply having trouble unwinding their positions.

Speculators were not alone in causing the price bubble—commercial  
traders were behind the last leg in oil's rise, from about $110 a  
barrel to its July 11 peak of $147 a barrel, according to Fingerman.  
But could speculators now be now be causing prices to overshoot on the  
downside?

Some seasoned oil hands think at least part of the problem is financial  
liquidity—the sell-off has gone so far that there isn't enough bank  
lending to finance trading. Yet there are others, such as Peter Beutel,  
a New Canaan (Conn.) oil analyst, who believe prices are in sync with  
the market. "I don't think $50 oil is a bubble as much as a return  
swing of the pendulum," Beutel said.

Still-Active Speculators

What if oil prices begin creeping back up? Will the hedge funds,  
pension funds, and college endowments tiptoe back into the futures  
market? Dennis Gartman, a seasoned oil trader in Suffolk, Va., thinks  
not: "As Mark Twain said, the cat who has sat on a hot stove won't sit  
on a hot stove again—or even a cold one—because to him all stoves are  
hot."

But recent price swings indicate that speculators are still active. On  
Wednesday, Jan. 7, news of a fresh increase in U.S. oil and gasoline  
inventories reversed a spike in oil prices, to over $50 a barrel, just  
the day earlier. That had been provoked by the fighting in Gaza and the  
natural gas dispute between Russia and Ukraine. Oil plunged on Jan. 7,  
to $42.63 a barrel on the New York Mercantile Exchange, on news of a  
6.6 million-barrel rise in oil stored in U.S. storage tanks. That was  
five times the 800,000-barrel increase expected by the market. Tanks  
now hold 325.4 million barrels of oil, the most since May.

Price Hikes Ahead?

The rising amount of oil in storage at least partly reflects the  
biggest gamble on the market now—that oil prices will somehow rise  
steadily over the next months and years, a position in the trade called  
"contango." When contango happens, speculators respond by storing all  
the oil they can at a price locked in with two futures contracts, with  
the idea of profiting down the road when they can sell it at that  
price.

Gartman, the Suffolk (Va.) trader, said that if he could get his hands  
on $10 million, he would pump every cent of it into crude oil futures.  
If he bought February 2009 oil futures (selling for $41.24), and a sell  
order for February 2010 (selling for $60.22), he would pocket more than  
40% profit after covering fees and storage expenses, he says. Too bad  
banks aren't lending, Gartman says, though even if they were the world  
is so awash in crude that there is almost no place to store it.

Storage is so hard to come by that traders are storing it at sea in  
2-million-barrel supertankers. About two dozen supertankers are already  
hired out for storage purposes, and Bloomberg reported on Jan. 7 that  
oil traders are seeking to let as many as 10 more.

LeVine is a correspondent in BusinessWeek's Washington bureau.