Story well describes the spec influence on energy and other commodities now. Doesn't really fully relate the true cause however. One percent rates in US encourages this speculation, and in fact makes it profitable. I don't really see this going away until interest rates are raised significantly in the US. It's not a "four buck fund premium" to oil, it's a "Greenspan premium", give credit (or blame) where credit is due.
Rising fund activity fuels volatility in oil prices
Reuters, 01.16.04, 12:24 PM ET
By Richard Valdmanis and Barbara Lewis
NEW YORK/LONDON, Jan 16 (Reuters) - Money managers are becoming a dominant player in the world energy markets, helping vault oil prices to record heights but threatening to cause them to plummet just as fast.
Rising speculation in a market troubled by the lowest U.S. crude supplies in 28 years with a deep freeze in the U.S. Northeast boosting demand has amplified a boom in petroleum prices that could derail economic recovery.
"U.S. inventories are deemed to be near critical levels. To go short does not make sense," said Ian Henderson, vice president and fund manager at JP Morgan Fleming.
"With all of the fund buying, the market tends to overshoot the mark on the upside," said Jim Ritterbusch of Ritterbusch and Associates in Illinois. "But it could also cause the market to undershoot the mark on the downside."
Noncommercial speculators last week took up more than 30 percent of the oil market and more than 40 percent of the gasoline market -- both within striking distance of records hit late last year, according to government data.
A decade ago noncommercials, or players who trade a product they don't actually make or use for the sake of profit, amounted to only 10 to 20 percent of the market.
The rising influence of fund buyers has triggered a spike in energy prices this month as funds took an all-time high net long position in the gasoline market and four-year high net long position in crude, according to analysts.
A long position means futures were bought. A short position is the reverse, meaning futures were sold.
"Price action is completely dominated by the funds," said Frederic Lasserre, head of commodities research at Societe General in Paris.
"Funds are adding at least 4 dollars to the price of a barrel," he added, echoing claims by some members of OPEC that speculation is pushing prices above the oil cartel's stated target range of $22 to $28 per barrel for its basket of crudes.
The fund interest has been driven by worries over the lowest inventories in the United States since 1975 and a blast of arctic air into the heavily populated eastern corridor of the United States that has raised energy demand. The U.S. Northeast is the biggest consumer of heating oil around.
IN VOGUE
Analysts said fund activity picked up in most commodities markets as they fled the dollar amid concerns over a widening U.S. trade deficit. Funds jumped into raw materials like metals and cotton which rallied on signs that economic recovery would boost demand after supplies had declined in recent years.
"In 2003, commodities were what was in vogue because it's a way of playing the economic growth story," said Edward Meir, analyst at Man Financial in London. "They do exaggerate prices. There's no doubt about it, but eventually fundamentals have to govern," he added.
Crude oil on the New York Mercantile Exchange hit $35.20 a barrel this week, the highest since March 17 before the U.S.-led war on Iraq. The infusion of cash into the futures market helped gasoline on the NYMEX hit $1.031 a gallon on Jan. 9, the highest price since late August.
With such a heavy presence of noncommercials weighing into the market, oil dealers are concerned there may be an exodus that could drive prices sharply lower at the first sign of an improvement in inventories.
"Although unexpected strength in the economic recovery has improved our 12-month ahead outlook, we continue to expect a significant near-term pullback in WTI prices to the mid-$20s as new supplies come to the market," Goldman Sachs stated in a research report, referring to West Texas Intermediate crude oil which is listed on the NYMEX.
A sharp decline in prices would be welcome to consuming nations hanging on to the momentum of economic recovery, but it would also underscore the volatility added by funds that can often wreak havoc in energy-dependent industries.
"Funds add liquidity to the market and serve an economic purpose, but there is a perception that they do all their buying or selling at once," said Tim Evans of IFR Pegasus in New York.
Still, other analysts say high prices are here to stay owing to rising demand, particularly from China, and a clever output policy by OPEC.
The oil cartel will meet to review its output policy Feb. 10. Members of the group have said they would prefer lower oil prices, but are wary of an expected seasonal decline in demand early this year.
OPEC president Purnomo Yusgiantoro said on Friday OPEC remained undecided on whether it would change output limits at the meeting, despite one member's forecast that production would be left unchanged. |
