Are Oil Prices Headed For Another Spike?

[Brad Kenney]

Interesting 60 Minutes interview with Dan Gilligan, president of the Petroleum Marketers Association, who represents more than 8,000 retail and wholesale suppliers, everyone from home heating oil companies to gas station owners.

Gilligan blames the instability in the oil markets as the result of speculators who profit from volatility.

"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions."

From the other side, Kroft talked to a hedge fund manager named Michael Masters who tracks investment flows for a living, and who corroborates the massive inflows into oil markets of speculative dollars by the likes of

"...hedge funds, Wall Street trading desks were following right behind them, putting money - sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."

Masters (who upon further research I see testified before Congress on this topic this summer) says that the amount of capital placed in commodities went from $13 to $300 billion in a five year period, and that his company had:

"...talked to the largest physical trader of crude oil. And they told us that compared to the size of the investment inflows - and remember, this is the largest physical crude oil trader in the United States - they said that we are basically a flea on an elephant."

Now, I'm not one to buy into paranoia about market cornering (the global petroleum market is just too big anyway).

I'm also not one to say that it doesn't matter whether or not speculators bid up the price of oil, as I've also read analyses that tie last summer's spike in oil prices to the quickness of the shift in demand for automobiles that is positively crippling our industrial economy right now.

Even if it was large institutional investors and ruthless speculators buying the price up, they were probably doing so on the prediction that the market fundamentals indicate a rising demand, so to prevent this type of speculation would keep the price artificially low (which it has been for a long, long time anyway).

And speaking of low, low prices, I now hear tell via Marketplace that investment banks are in possession of some 50 million barrels of oil that are sitting on supertankers, not going into port and not getting unloaded, just waiting for another upwards oil price swing to bring a bigger profit.

Imagine what happens, then, when the price swings up (for one of the literally hundreds of rotating reasons given by commodities traders on a yearly basis) and a fleet of huge supertankers steam on into port with 50 million barrels of oil for sale.

It's interesting to me to entertain the (probably specious) thought that the Saudis and Exxon et al have less power over the pricing of their goods than do those dastardly Wall Streeters.

Ah, investment bankers -- is there anything you can't screw up?

[Jazd]

Originally Posted by Brad Kenney

Even if it was large institutional investors and ruthless speculators buying the price up, they were probably doing so on the prediction that the market fundamentals indicate a rising demand, so to prevent this type of speculation would keep the price artificially low (which it has been for a long, long time anyway).

And speaking of low, low prices, I now hear tell via Marketplace that investment banks are in possession of some 50 million barrels of oil that are sitting on supertankers, not going into port and not getting unloaded, just waiting for another upwards oil price swing to bring a bigger profit.

Imagine what happens, then, when the price swings up (for one of the literally hundreds of rotating reasons given by commodities traders on a yearly basis) and a fleet of huge supertankers steam on into port with 50 million barrels of oil for sale.

It's interesting to me to entertain the (probably specious) thought that the Saudis and Exxon et al have less power over the pricing of their goods than do those dastardly Wall Streeters.

Ah, investment bankers -- is there anything you can't screw up?

Unbelievable...this really makes you think about the business of it all.

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[rbrooku]

Another spike soon would actually be a good thing. American consumers are not yet completely convinced that buying and driving SUVs as ordinary transportation is a bad thing. One more spike could not go that high or last that long because it would cause an immediate drop in demand, but it could serve as a wake up call to the American public that they have been rather less intelligent and more sheep like than they have previously admitted to themselves.

As for the typical "Harvard MBA" (as a catch all phrase for most of the elites of American business), I have been saying for years that they are a long term failure because of their well developed short term skills of self enrichment.

[elcamino1970ss]

I would hope that all the speculators remember that raising the price of oil means that if everyone spends extra money filling the cars they cannot spend all the money on other items that keep the economy running. And this will put them right back where they are today!