Opec lobbies for US to limit activity of oil market speculators
January 29, 2009
By Bloomberg
Oil surged 46 percent in the first half of last year to a record $147.27 (R1 481 at yesterday's exchange rate) a barrel, only to plunge by the end of the year, prompting Opec to make its biggest supply cuts.
"Opec has repeatedly called for the need to reduce the role of excessive speculative activity in the market," said El-Badri, who will attend this week's World Economic Forum in Davos, Switzerland. "Today, it is impossible to know who is actually buying and selling oil futures."
While US congressional leaders proposed legislation to curtail speculation as rising oil caused petrol to reach $4 a gallon (about R10 a litre today) in the US summer last year, regulators at the Commodity Futures Trading Commission (CFTC) are divided over the role of hedge funds in last year's surge in prices. Since then, a series of Opec supply cuts has failed to boost prices as demand has weakened in what may be the worst global recession in the post-war era.
"The move above $90 a barrel was driven by financial flows rather than fundamentals" of supply and demand, said Edward Morse, the chief economist at Louis Capital Markets in New York. Selling by speculators "helped propel the commodities price downturn, but fundamentals have weighed heavily as well".
Oil and copper led a rout last year in prices of most metals, industrial and agricultural commodities, save gold.
El-Badri said he planned to raise the issue of increasing transparency in energy markets at a session in Davos today on whether "long-term investment strategies are reshaped by short-term energy economics". Tony Hayward, the chief executive of British oil major BP, and Ilham Aliyev, the president of Azerbaijan, an oil exporting nation, are on the same panel.
Net long positions in New York crude futures by hedge funds and other large speculators betting on higher prices peaked at 115 145 contracts last March, according to data from the CFTC. They switched direction in July to a net short position, or a wager against prices, which reached 52 984 contracts by mid-November, the data show.
A CFTC staff report dated September 11 2008 found no correlation between rising oil prices and the role of index fund investors and securities firms.
Legislation to limit speculative trading was approved by the US house of representatives in September. The senate failed to bring its version to a vote. President Barack Obama has yet to comment on the need to rein in commodity traders.
Oil closed at $41.58 a barrel on Tuesday on the New York Mercantile Exchange, down 72 percent from last year's record. Prices have fallen 7 percent this year.
Interest from speculators has rebounded, with the number of barrels owned by active speculators, index funds and other investors only 13 percent lower than it was when oil prices peaked in July, Goldman Sachs Group analyst Jeffrey Currie said in a report this week.
Trading volume in New York rose to a record high last year. The number of contracts bought and sold averaged almost eight times the daily global oil production in 2008, up from three times in 2005, according to Olivier Jakob, the managing director of PetroMatrix, an energy market consultancy based in Switzerland.
"Even if we look back at 1998 and 1986, we've never had this violent a shift at this extreme in terms of prices," said Daniel Yergin, the chairman of Cambridge Energy Research Associates, referring to previous bear markets. Yergin will also be attending the forum in Davos, as will Jeroen van der Veer, the chief executive of oil multinational Royal Dutch Shell.
Opec blamed speculators for last year's record surge; the cartel said it was supplying enough oil to meet demand.
World consumption this year will fall for a second year, the first back-to-back contraction in 25 years, according to the Paris-based International Energy Agency (IEA).
While Opec complains about the lack of market transparency, the group no longer publishes production targets for individual nations and does not trust its members' own assessments of their production, instead relying on third-party estimates.
El-Badri said last week that Opec and the IEA were trying to improve market data with their joint oil data initiative, which collects energy information from more than 90 countries.
Saudi Arabia wants oil at $75 a barrel, a level that it says is appropriate to drill in deep waters and in Canadian oil sands.
Libyan leader Muammar al-Qaddafi wants oil at $100 to help pay for infrastructure projects.
"As oil demand is now skewed to the downside, there are major question marks hanging over our longer-term investment plans," said El-Badri, a former Libyan oil minister who was appointed to Opec's senior permanent position two years ago. "It is essential that we have some clear indication on future oil demand."
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