Hedge Fund Study Says Oil Spike and Decline Due to Speculation

Masters Capital Management is a hedge fund based in Christiansted, Virgin Islands, with an additional office in Atlanta, Georgia. As such, it is a pillar of modern global capitalism. It has just furnished a report that says “large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices.”

The MCM report claims that $60 billion of speculative money went into the oil markets during the first five months of the year. During that time, the price of oil rose from $95 a barrel to $145 a barrel. The report also says that $39 billion of that $60 billion has been taken out since July when oil peaked. The price is now slightly above $100 a barrel. Michael Masters of MCM stated, “We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down,” adding that the money manager’s move into the oil markets was “way off the scale.”

This is not a new song for Mr. Masters to be singing. Back in May, he testified before the US Senate committee on homeland security and governmental affairs. He pointed out that US government data showed that annual Chinese demand for petroleum increased 920 million barrels over the past five years, while demand from speculators has moved up 848 million barrels over the same period. He succinctly put it, “The increase in demand from speculators is almost equal to the increase in demand from China.”

Part of the problem is the lax margin requirements in the oil trade. Back in May, the NYMEX raised margins for the crude oil, crude oil calendar swap, and crude oil financial futures contracts to $7,250 from $6,500 for clearing members, to $7,975 from $7,150 for members and to $9,788 from $8,775 for customers. When one considered that a contract for crude on the NYMEX is 1,000 barrels, worth around $100,000 at current prices, those margin requirements are ludicrously low.

However, that isn’t the only issue. The so-called “dark markets” also aggravate the problem. Electronic trading platforms like the InterContinental Exchange [ICE] account for most of the oil trading, and the US regulators can’t touch it because it is considered a foreign exchange. ICE headquarters are in Atlanta, its primary data center in Chicago, and nearly all its trades settled in US dollars, but it claims its “energy futures business” is conducted in London. By the end of 2007, the all-electronic exchange accounted for almost 50% market share of all global oil futures contracts, a total of 138.5 million contracts.

Forget the mantra “Drill, baby, Drill” and try “Regulate, baby, Regulate.” It isn’t as good a slogan, but it is a better policy.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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