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Some wonder if speculators are fueling oil run-up
David Ivanovich, Houston Chronicle
With American motorists struggling to pay record-high gasoline prices, a debate rages in the halls of Congress and across the Oil Patch over the role speculators may be playing in driving up oil prices.

Crude prices have rocketed nearly $70 a barrel in the past year. Some energy experts suggest speculation could account for $20 to $30 of that run-up.

Desperate to help angry constituents, lawmakers have been scrambling to find solutions. They have voted to close the so-called Enron loophole by regulating electronic trading, and they've given the Federal Trade Commission more authority to guard against market manipulation.

Now some energy and trading experts are calling on lawmakers to focus on the pension funds, endowments and other institutional investors - including the University of Texas and the state's teacher retirement system - that have poured billions of dollars into the commodities futures market in the last few years. The trend has exacerbated the crude price run-up, these analysts say.
(24 May 2008)

Energy Speculators Draw the Heat
Nelson D. Schwartz, New York Times
FOR the energy industry and the financial players that have bet on surging oil prices, this should be a time of euphoria. Not only do prices keep hitting record highs, but trading volumes on contracts for everything from crude to gasoline to diesel have followed a similar arc, generating big profits for bourses like the New York Mercantile Exchange and the Intercontinental Exchange.

But as I wrote in my last column, the pickup in prices and trading has reignited the idea that speculators are to blame, not underlying market conditions. That claim isn’t new: People have been blaming speculators for about as long as there have been markets. But in recent days, a more powerful group has joined the antispeculation bandwagon: members of Congress.

On Wednesday, as oil passed $133 a barrel, members of the Senate Judiciary Committee vented their wrath on oil industry executives. The day before, it was the turn of the Senate’s Homeland Security and Governmental Affairs Committee to get into the act.

Of course, Big Oil has drawn populist ire ever since the days of John D. Rockefeller and the muckrakers. And in an election year, with gas prices passing $4 a gallon, attacking the energy industry is a can’t-lose proposition.

But this time, it’s Wall Street and the newly public commodity exchanges that are sharing the Congressional spotlight.
(25 May 2008)

Cheap oil is history. But why?
Dan Roberts, UK Telegraph
100 years after oil was found in the Middle East, prices are at $135 a barrel. What’s driving the surge?
---
... There’s plenty of the black stuff still down there, but it sounds more like someone slurping at a straw, poking around the bottom of a glass in among the ice cubes.

... The stampede in the oil market is making billions of dollars for a lucky few and leading others to wonder whether the world is finally starting to run dry. Until recently, the notion that international production was about to reach its limits - the so-called “peak oil” theory - was the preserve of cranks and crackpots.

The orthodoxy was that we had decades of growth left to come. Now peak oil conspiracy theories are passing into the mainstream. Even the prestigious International Energy Agency is preparing to slash its estimate of how much oil is left.

A gradual decline in global production might last for decades, but the laws of supply and demand move much faster: as the giant economies of China and India demand ever more energy, the pessimists claim only a dramatic change in our lifestyles will avoid further skyrocketing oil prices.

... But the facts are not that simple. Just as the theory of peak oil is gaining ground in the trading rooms of London and New York, other conspiracy theorists are winning over politicians and commentators with a rival explanation for soaring prices.

... The controversial theory is that the traders themselves are to blame. By speculating on ever higher prices, they are ensuring that they come about. Ordinarily, such arguments would be dismissed as economic illiteracy. Most economic studies maintain it is just not possible to influence the market in this way.

But the changing role of investors has attracted attention at the highest level.
(23 May 2008)
Long article.

Oil insiders say investors driving up prices by banking on fear of low supply
Jim Landers and Elizabeth Souder, Dallas Morning News
You're paying way more for gasoline than common sense would suggest, and you might be surprised by who's to blame.

Not the Organization of Petroleum Exporting Countries. It lost control of the markets 20 years ago. Not Big Oil. It contributes only a sliver of global oil supply. Not the government. The U.S. investment in oil is relatively small.

Each of these former powerhouses influences the market sometimes, but these days what's driving prices higher is a rush of new investors. From professional fund managers to regular people trying to make a buck, investors with no interest in actually owning oil are pouring billions of dollars into oil markets.

Those investors are banking on fears that it will become much more difficult and expensive to produce oil, and, eventually, the world might not have enough.

Oil industry insiders scoff at those fears. They accuse traders of a frenzy of irrational buying, creating a bubble that's sure to burst.

While current supply data doesn't offer reason to panic, no one knows for sure how much oil is left in the ground. So it's impossible to know if shortages loom, and whether investors are acting rationally. People are looking at the same data but interpreting it differently.
(25 May 2008)
As the headline indicates, this article seems to voice the opinion of the American oil industry. It's interesting that the authors believe it is "impossible to know if shortages loom" - this is not reassuring coming from industry insiders. -BA

Oil trade's winners now reap the wrath
Tom Petruno, Los Angeles Times
Investing in commodities has been a brilliant move in this decade -- so brilliant that the strategy has attracted untold numbers of large and small players, particularly in the last few years.

What do you suppose all of their buying has done to the price of oil? Pushed it down?

With crude surging above $130 a barrel this week for the first time, a long-simmering issue is threatening to boil over: the role these new investors, often derided as rank speculators, have had in stoking the prices of oil and other commodities.

Their standard line has been, "It's not our fault." They point to rising demand for raw materials in China and other developing nations and to tight supplies as the main drivers of prices.

But at a Senate hearing Tuesday, a hedge fund manager named Michael Masters offered a different viewpoint.

He branded institutional investors such as pension funds as "one of if not the primary factors affecting commodities prices today."

... If the commodity surge has become a bubble, as many Wall Street pros believe, it will end the way all bubbles end -- with a crash that will humble those who came late to the party. There's probably no need for politicians to get involved.

But a hands-off approach may be impossible if oil keeps climbing in the near term, exacting a heavier toll on struggling consumers.

As for investors who have turned to commodities for diversification, consider this: If their buying helps drive oil prices high enough to trigger a deep recession, the devastation in the stock portions of their portfolios could far exceed the gains they rack up in commodities. There's an irony waiting to happen.
(24 May 2008)
On the other hand, if you believe that peak oil is at hand, then the high oil prices are a Godsend - a wake-up call to a society that only responds to dramatic economic signals. In this case, we should thank speculators for bidding up the price of oil. -BA

No question that basic demand from actual commodity users, and tight supplies, lit the fire under prices. And yes, Peak Oil Theory is gaining more believers by the day. But does anyone really believe that the pile-on effect from investors and speculators isn't a meaningful factor in driving prices now -- as opposed to, say, 10 years ago, before the institutional-investor crowd caught the hard-asset bug?