Speculators jack up the cost of oil -- Ascending Light

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Date Posted: 14:37:04 06/02/08 Mon
Author: Weird_Enigma
Author Host/IP: 4.152.126.132
Subject: Speculators jack up the cost of oil

Speculators probed on role in oil costs
Regulators say investigation made public because of today's `unprecedented' market

KEVIN G. HALL
McClatchy Newspapers

WASHINGTON --
Federal regulators said Thursday that they've been probing whether speculators are manipulating the price of oil and gasoline and announced a series of measures to make the opaque world of oil trading more transparent.

In a surprise announcement, the Commodity Futures Trading Commission confirmed that since last December it has been investigating the trading of contracts for future deliveries of oil, commonly called futures contracts.

Such investigations are normally confidential, but regulators said they made this one public "because of today's unprecedented market conditions." It did not release details, but added: "All commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices."

The acknowledgement of the probe seemed to suggest that there might be some truth to rumors of market manipulation. Normally, probes are kept quiet to avoid damaging reputations if no wrongdoing is uncovered.

Analysts said the CFTC action would likely have a limited impact on oil prices, which have risen on a combination of factors, including growing demand in China and other nations, the falling value of the dollar, geopolitical tensions and low interest rates, which have fueled a futures buying binge by institutional investors seeking to ride oil's upward momentum.

Still, the move "will have a chilling effect" on speculative investors' enthusiasm for energy futures, predicted Howard Simons, a strategist at Bianco Research in Chicago. "What they're saying ... is, `You either stop this or we're going to stop it for you,' " Simons said.

If speculators are running up oil prices, the obvious next question is by how much?

Former Federal Reserve chairman Alan Greenspan has guessed that speculators may add at least $10 to the price of a barrel of oil. Other analysts have put the figure as high as $20.

A barrel of crude oil contains 42 gallons of oil, but a $1 rise in per-barrel costs doesn't translate an equal increase in the cost of gasoline. According to the American Petroleum Institute, crude oil costs about $1.09 more per gallon since Jan. 1, while gasoline has risen about 70 cents per gallon.

The unusual CFTC announcement followed several congressional hearings, the latest on May 20, where a prominent hedge fund manager testified that speculators in commodities markets are running up the price that Americans pay for gasoline and food.

Michael Masters, a portfolio manager for Masters Capital Management, runs a hedge fund that invests money on behalf of wealthy investors. He told senators that the prices of most major commodities such as wheat, corn and oil have doubled and in some cases tripled over the past five years while supplies of them are adequate. The reason, he said, "is a demand shock coming from a new category of participant in the commodities futures markets: institutional investors."

Commodities markets have always attracted speculators who try to make fortunes by betting on the shifting prices of everything from pork bellies to oil. But today's commodities markets are flooded with money from deep-pocketed investors such as corporate and government pension funds, university endowments and foreign-owned investment vehicles called sovereign wealth funds.

These players, called index speculators, far outnumber the investors who plan to take delivery of a barrel of oil or a bushel of corn. Index speculators tend to distribute their money across an index of two dozen or so major commodities and essentially bet that prices will go up. In industry parlance, they "go long."

In the stock market, this strategy of buying and holding is normal. But trading in most commodities happens on a much smaller scale, so these indexed investments are overwhelming trading.

"You cannot throw this much `long' money into a relatively small market without the ability to have a supply response and prices not go up," said Howard Simons, the president of Rosewood Trading, an economic research firm in Glenview, Ill. "It has to go up."

Other measures

Regulators on Thursday also announced initiatives to increase transparency of the commodities markets. For example, they said they will immediately require monthly reports from institutional investors who manage funds designed to mimic the price of crude oil and other energy futures. The goal, they said, is to identify the amount of such index trading and to "ensure that this type of trading activity is not adversely impacting the price discovery process."

The Associated Press contributed.

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