Page 2 of
2 Speculators knock OPEC off
oil-price perch By F William
Engdahl
States to use ICE terminals in the
United States to trade its new WTI contract on the
ICE Futures London exchange. ICE Futures as well
allowed traders in the United States to trade US
gasoline and heating oil futures on the ICE
Futures exchange in London.
Despite the
use by US traders of trading terminals within the
United States to trade US oil, gasoline and
heating oil futures contracts, the CFTC has until
today refused to assert any jurisdiction over the
trading of these contracts.
Persons within
the United States seeking to trade key US energy
commodities - US crude oil, gasoline and heating
oil futures - are able to avoid all US market
oversight or reporting requirements by
routing their trades through the
ICE Futures exchange in London instead of the
NYMEX in New York.
Is that not elegant?
The US government energy futures regulator, CFTC,
opened the way to the present unregulated and
highly opaque oil futures speculation. The present
chief executive officer of NYMEX, James Newsome,
who also sits on the Dubai Exchange, is a former
chairman of the US CFTC. In Washington doors
revolve quite smoothly between private and public
posts.
A glance at the price for
Brent and WTI futures prices since January 2006
indicates the remarkable correlation between
skyrocketing oil prices and the unregulated trade
in ICE oil futures in US markets. Keep in mind
that ICE Futures in London is owned
and controlled by a US
company based in Atlanta, Georgia.
In
January 2006, when the CFTC allowed the ICE
Futures the gaping exception, oil prices were
trading in the range of US$59-60 a barrel. Today,
some two years later, we see prices tapping $120
and trending upwards. This is not an OPEC problem.
It is a US government regulatory problem of malign
neglect.
By not requiring the ICE to file
daily reports of large trades of energy
commodities, it is not able to detect and deter
price manipulation. As the senate report noted:
The CFTC's ability to detect and
deter energy price manipulation is suffering
from critical information gaps, because traders
on OTC electronic exchanges and the London ICE
Futures are currently exempt from CFTC reporting
requirements. Large trader reporting is also
essential to analyze the effect of speculation
on energy prices.
The report added:
ICE's filings with the Securities
and Exchange Commission and other evidence
indicate that its over-the-counter electronic
exchange performs a price discovery function -
and thereby affects US energy prices - in the
cash market for the energy commodities traded on
that exchange.
In the most recent
sustained run-up in energy prices, large financial
institutions, hedge funds, pension funds and other
investors have been pouring billions of dollars
into the energy commodities markets to try to take
advantage of price changes or hedge against them.
Most of this additional investment has not come
from producers or consumers of these commodities,
but from speculators seeking to take advantage of
these price changes. The CFTC defines a speculator
as a person who "does not produce or use the
commodity, but risks his or her own capital
trading futures in that commodity in hopes of
making a profit on price changes".
The
large purchases of crude oil futures contracts by
speculators have, in effect, created an additional
demand for oil, driving up the price of oil for
future delivery in the same manner that additional
demand for contracts for the delivery of a
physical barrel today drives up the price for oil
on the spot market. As far as the market is
concerned, the demand for a barrel of oil that
results from the purchase of a futures contract by
a speculator is just as real as the demand for a
barrel that results from the purchase of a futures
contract by a refiner or other user of petroleum.
Perhaps 60% of oil prices are
speculation Goldman Sachs and Morgan
Stanley today are the two leading energy trading
firms in the United States. Citigroup and JP
Morgan Chase are major players and numerous hedge
funds speculate.
In June 2006, the senate
investigation estimated that of oil traded in
futures markets at some $60 a barrel, about $25 of
that was due to pure financial speculation. One
analyst estimated in August 2005 that US oil
inventory levels suggested WTI crude prices should
be around $25 a barrel, and not $60.
That
would mean today that at least $50 to $60 or more
of today's $115 a barrel price is due to pure
hedge fund and financial institution speculation.
However, given the unchanged equilibrium in global
oil supply and demand over recent months amid the
explosive rise in oil futures prices traded on
Nymex and ICE exchanges in New York and London, it
is more likely that as much as 60% of the oil
price today is pure speculation. No one knows
officially except the tiny handful of energy
trading banks in New York and London, and they
certainly aren't talking.
By purchasing
large numbers of futures contracts, and thereby
pushing up futures prices to even higher levels
than current prices, speculators have provided a
financial incentive for oil companies to buy even
more oil and place it in storage. A refiner will
purchase extra oil today, even if it costs $115
per barrel, if the futures price is even higher.
As a result, over the past two years crude
oil inventories have been steadily growing,
resulting in US crude oil inventories that are now
higher than at any time in the previous eight
years. The large influx of speculative investment
into oil futures has led to a situation where we
have both high supplies of crude oil and high
crude oil prices.
Compelling evidence also
suggests that the oft-cited geopolitical, economic
and natural factors do not explain the recent rise
in energy prices - this can be seen in the actual
data on crude oil supply and demand. Although
demand has significantly increased over the past
few years, so have supplies.
Over the past
couple of years, global crude oil production has
increased along with increases in demand; in fact,
during this period global supplies have exceeded
demand, according to the US Department of Energy.
The US Department of Energy's Energy Information
Administration (EIA) recently forecast that in the
next few years, global surplus production capacity
will continue to grow to between 3 and 5 million
barrels per day by 2010, thereby "substantially
thickening the surplus capacity cushion".
Dollar and oil link A common
speculation strategy amid a declining US economy
and a falling US dollar is for speculators and
ordinary investment funds desperate for more
profitable investments amid the US securitization
disaster to take futures positions selling the
dollar "short" and oil "long".
For huge US
or EU pension funds or banks desperate to get
profits following the collapse in earnings since
August 2007 and the US real estate crisis, oil is
one of the best ways to get huge speculative
gains. The backdrop that supports the current oil
price bubble is continued unrest in the Middle
East, in Sudan, in Venezuela and Pakistan and firm
oil demand in China and most of the world outside
the US. Speculators trade on rumor, not fact.
In turn, once major oil companies and
refiners in North America and European Union
countries begin to hoard oil, supplies appear even
tighter lending background support to present
prices.
Because the OTC and London ICE
Futures energy markets are unregulated, there are
no precise or reliable figures as to the total
dollar value of recent spending on investments in
energy commodities, but the estimates are
consistently in the range of tens of billions of
dollars.
The increased speculative
interest in commodities is also seen in the
increasing popularity of commodity index funds,
which are funds whose price is tied to the price
of a basket of various commodity futures. Goldman
Sachs estimates that pension funds and mutual
funds have invested a total of approximately $85
billion in commodity index funds, and that
investments in its own index, the Goldman Sachs
Commodity Index, have tripled over the past few
years. US Treasury Secretary Henry Paulson is a
former chairman of Goldman Sachs.
F
William Engdahl
is author of A Century of War:
Anglo-American Oil Politics and the New World
Order. He may be contacted at
info@engdahl.oilgeopolitics.net
(Copyright 2008 Asia Times Online Ltd. All
rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
