Posted on 07/04/2008 5:53:48 AM PDT by kellynla
NEW YORK (Fortune) -- Atlanta hedge fund manager Michael Masters has been a star witness in two recent Congressional hearings on how speculators are supposedly driving up oil prices. Masters and I don't see eye-to-eye on this issue, so I was surprised to get a call from him after my "Don't Blame The Oil Speculators" column went up on Fortune.com last week.
Masters contends that without speculators, the price of oil would be $65 or $70 a barrel. He points out that the amount invested in commodities index products has risen from $13 billion to $260 billion in five years, a fact he thinks is key to understanding oil prices.
"When a trader sends a buy order to the exchange floor or presses the 'buy' key on their trading terminal, if he or she is attempting to buy more contracts than are currently offered for sale at the market price, then the market price will rise," Masters told a House subcommittee in June.
My own view is that speculators can't materially impact prices if all they're doing is making bets on the direction of oil prices by trading futures and not taking delivery of actual oil - hoarding stuff that would otherwise go to consumers.
People don't fill up their tanks with futures contracts, and there's no evidence investors are putting more oil into storage as a bet on higher future prices.
In the end, Masters and I simply agreed to disagree. But there was one thing he said that really piqued my interest. "What do you think would happen," Masters asked, "if the market went into liquidation-only mode [i.e. if speculators started unloading their futures contracts], like we saw with the Hunt brothers in 1980?"
(Excerpt) Read more at money.cnn.com ...
I’m not arguing that all oil speculation is bad. I’m arguing that the rapid influx of long-term ‘investment’ speculators such as hedge funds into a market that is already extremely tight serves no purpose except to drive up the price of oil.
Because anytime there is a rapid influx of new buyers bidding for the same amount of goods... the price spikes.
And yes, eventually, the price will plummet if oil speculators sell en masse. The problem is that the institutional investment funds are not looking to eventually do so. They are viewing oil as the next gold, to keep as a long-term investment... and are, right now, trying to snap-up as much oil as possible, regardless.
But they are only holding on to the contract, not the oil itself.
And yes, eventually, the price will plummet if oil speculators sell en masse.
They do sell en masse. Every month before the contracts mature. Have you noticed oil dropping every month just before the futures mature?
The problem is that the institutional investment funds are not looking to eventually do so.
The only alternative to their monthly selling is taking delivery of the oil and putting it into storage. I haven't heard that they're doing that.
They are viewing oil as the next gold, to keep as a long-term investment
Long term, until they sell every month.
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