Soros Says Oil 'Bubble,' Market Signal Recession (Update1)
By Matthew Leising
June 3 (Bloomberg) -- Billionaire investor George Soros said an oil price "bubble" is working with fundamentals in the market that may lead to a recession in the world's largest economy.
``The rise in oil prices aggravates the prospects for a recession,'' Soros said in testimony prepared for delivery today to the Senate Committee on Commerce, Science, and Transportation. ``The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,'' he said. ``To be sure, a crash in the oil market is not imminent.''
The committee is holding hearings on potential energy price manipulation. Congressional leaders are pushing the Commodity Futures Trading Commission and other agencies to step up efforts at overseeing the markets for fuels such as gasoline as retail prices are forcing consumers to drive less. The hearings come as oil has retreated from a record $135.09 a barrel on May 22.
The average nationwide pump price for regular gasoline rose to a record $3.978 a gallon yesterday, AAA said. The price was above $4 in 12 states and the District of Columbia.
Gasoline demand in America fell 5.5 percent from a year ago in the week ended May 23, according to MasterCard Inc.'s weekly SpendingPulse report. Sales have declined in 15 of the past 18 reports, when compared with a year earlier.
Soros said too much regulation of oil markets could drive trading into unregulated areas such as the over-the-counter market. He laid some of the blame on recent oil price rises on commodity index funds, which only buy oil contracts, helping to push prices higher.
`Legitimate Asset Class'
``Commodity indexes are not a legitimate asset class,'' he said. He added that raising margin accounts would not affect index trading but could function to limit speculation.
Oil has gained 91 percent in a year. The CFTC said last week it's been investigating the transportation, storage and trading of U.S. crude since December. The commission took the unusual step of announcing an on-going investigation due to ``unprecedented market conditions,'' it said May 29.
The announcement by the CFTC followed congressional criticism of the agency's regulatory practices.
Senator Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee, said last week that acting CFTC Chairman Walter Lukken may have used incomplete data in discounting speculators' impact on soaring oil prices.
Market Fundamentals
Speculators are not driving oil prices higher, according to energy exchange executives.
``We don't see that from our data, but I think it's important the CFTC assure everyone about what's driving prices,'' Nymex Chief Executive James Newsome said in a May 30 interview. ``Our data indicate the prices are moving by fundamentals.''
Intercontinental Exchange's Chief Executive Officer Jeff Sprecher agreed. ``In fact, it looks like the amount of speculators in energy markets has been decreasing as a percentage. What's been increasing is hedgers,'' he said in an interview the same day.
``We've seen this rapid influx of commercial users,'' Sprecher said. ``That's why we want to get data in the hands of regulators so they can provide assurance it's not speculators'' causing prices to rise.
Record oil prices are hurting industries such as airlines. Higher fuel prices may push some carriers into bankruptcy by next year, Soleil Securities Corp. said in a note to clients on May 21.
AMR Corp., parent of American Airlines, and UAL Corp., owner of United Airlines, are more likely to be forced into Chapter 11 in 2009 if fuel prices don't fall to ``sustained lower levels,'' analyst James M. Higgins said in the report.
To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.
Last Updated: June 3, 2008 11:11 EDT |
