MFG 2.0

Are Oil Prices Headed For Another Spike?

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?

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