With Morgan Stanley and Goldman Sachs projecting the next oil price spike just round the corner, Riyadh was almost forced into action — announcing to hold a consumer-producer summit and inviting all the stakeholders to the moot. Every one needs to be on board!
It’s been too long that the onus to prove innocence has been on the accused — the OPEC. In convening the producer-consumer summit and by inviting all the stakeholders, Saudi Arabia has underlined once again that producers cannot tame the Bull. It is beyond them. Market fundamentals are no more in control and others need to put in their weight rather than pointing fingers.
The move was made as panic set in with oil prices posting their biggest ever one-day surge last Friday, leaping more than $10 to a record high above $139 a barrel. And for a change, the G8 energy ministers, meeting the next day also looked inward, touting the need for domestic efficiency rather than piling pressure on ‘poor’ OPEC to pump more crude. And this was despite the call by the Australian Prime Minister Kevin Rudd for the G8 to “apply the blow-torch” to the OPEC. There seemed a realization that day in Aomori, Japan, that pushing the OPEC to produce even more has not worked as yet, and, it was time to look for other solutions.
There is a growing acceptance now all around that speculation is playing havoc with the markets. Even the British Energy Minister Malcom Wicks reaching Riyadh later today, now concedes that at least partially — if not fully — the speculators are to be blamed. Even some powerful G8 ministers at Aomori conceded they were powerless to fight the flow of financial capital. “There are relatively few things we can do short term,” US Energy Secretary Sam Bodman said.
And underlining the problem, a leading US senator is now pressing the top futures market regulator for more information about speculation by big investment funds in crude oil futures and other energy markets.
US Senator Jeff Bingaman, chairman of the US Senate Energy Committee, said Commodity Futures Trading Commission (CFTC) officials provided “glaringly incomplete” data to back up testimony that speculative trading is not the chief reason behind crude oil’s rise above $135 a barrel. CFTC experts had earlier testified that market forces are primarily responsible for the rising price of oil, although investors may be profiting from the trend.
Bingaman, a New Mexico Democrat, sent acting CFTC chairman Walter Lukken a letter asking why the agency classifies large investment banks and other swap dealers as commercial traders — the same category it uses for more traditional investors in the physical oil market such as oil companies and airlines.
Bingaman also said a recent trend of institutional investors buying petroleum storage capacity has led to “concerns regarding potential market manipulation strategies,” and asked the CFTC about how it tracks such trading activity.
Oil prices have doubled in the past year as big funds have poured money into commodities, seeking a hedge against inflation and the weaker dollar. Democrats in Congress have been looking for ways to rein in speculation in crude oil trading, which they see as the prime mover behind the surge in US oil futures to record highs.
Senate Majority Leader Harry Reid this month proposed legislation that would prevent traders of US crude oil from routing transactions through off-shore markets to evade speculative limits. It also sets forth reporting requirements.
Ralph Nader, former US presidential candidate, recently argued ‘oil was at $50 a barrel in January 2007, then $75 a barrel in August 2007. Now at $130 or so a barrel, it is clear that oil pricing is speculative activity, having very little to do with physical supply and demand.
Supplies of crude are so plentiful, according to the Wall Street Journal, “traders of physical crude oil say their market is suffering from too much supply, not too little.”
Iran, for instance, is storing 25 million barrels of heavy, sour crude oil because, in the words of Hossein Kazempour Ardebili, Iran’s oil governor, “there are simply no buyers because the market has more than enough oil.”
Mike Wittner, head of oil research at Societe Generale in London, agrees. “There are various signals out there saying for right now, the markets are well supplied with crude.”
Deborah Fineman, president of Mitchell Supreme Fuel Co. in Orange, New Jersey, summed up the scene: “Energy markets have been dictated for too long by hedge funds and speculators, who artificially manipulate the numbers for their own benefit. The current market isn’t based on the sound principles of supply and demand but it is being rigged by companies and speculators who are jacking up prices for their own greed.”
Harry C. Johnson, former banker who worked for many years inside Big Oil and ran his own small oil company in Oklahoma, blames “some industry experts, who profit greatly from the high price of crude, and have stated openly that the worldwide economic price of crude, absent speculators, would be around $50 to $60 per barrel.
Toshinori Ito, senior analyst at UBS Securities Japan says, “Oil prices are surging not because of a supply shortage, but because of massive liquidity,” referring to the influx of financial funds into markets, helped by low interest rates.
Chandren Nair, from the Global Institute for Tomorrow, told Al-Jazeera that increasing oil supply was not a solution to the current problems. “Increasing supply is a knee-jerk reaction you’d expect from politicians. It’s politically expedient to say we have to produce more ... it’s intellectually lazy. “But look at long-term issues facing the world. It doesn’t take a genius to understand we have to reduce the amount of oil we consume.”
Krchoksey, a brokerage firm, argues that the oil market is a bubble, and a number of super tankers chartered by oil-producing states are floating in the Gulf with inventories of oil they cannot sell.
“The situation is similar to the bubble in credit markets a year ago, where nobody wanted subprime mortgage bonds, but there was plenty of demand for ‘financial derivatives’ that allowed investors to bet on the future value of these bonds,” writes Amit Anand of Krchoksey.
Since September 2007, when the chairman of the US Federal Reserve, Ben Bernanke, started to slash interest rates, investors have hedged against the depreciation of the dollar with commodities.
Slowly but surely, the world seem coming round to the OPEC viewpoint on this very issue. With producers and consumers almost powerless to rein in the speculators, six billion consumers all around the globe are paying a price and a hefty one while a few are filling up their coffers. Long live capitalism!
