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Who Are the Speculators? You and Me!--Bilan
Bilan July 2008
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By Nicolas Pinguely in Bilan
Pension funds and banks are increasingly including commodities in investment portfolios. As a result, the rise in prices has become self-generating.
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Those damned speculators, cry the consumers. The oil price is hovering around $140 a barrel, compared to $60 just over a year ago. In Switzerland, the price of petrol at the pump has now topped CHF 2 per litre, a record high. And the upward trend continues.
Many blame the soaring prices on speculation, the supposed influence of an unseen hand. Even the U.S. Senate is voicing concern, and the Commodity Futures Trading Commission (CFTC), a U.S. federal agency charged with monitoring futures contracts, is probing possible manipulations. Speculators are said to account for 70% of today’s trading in crude oil at the New York Mercantile Exchange (Nymex), against 37% in 2000. Here is an exclusive interview with Daniel Jaeggi, co-founder of the energy trading company Mercuria in Geneva.
Speculation is said to be adding $30 to $40 per barrel to the cost of crude oil?
It’s impossible to say. We shall probably never know the precise effect of speculation. But one thing is certain: the amounts traded on futures markets have increased tremendously since 2003.
Who is buying these paper barrels, who are these speculators? Hedge funds?
Alternative investment funds may have played a part three or four years ago; at that time they did carry some weight. Today the classic financiers are the ones who are making their influence felt on the oil market. Primarily the pension funds and banks engaged in portfolio management. Thus you and me.
Really?
Yes, a proportion of commodities is increasingly being included in portfolios. Unlike hedge funds, whose speculation is both bullish and bearish, the positioning of those investors is solely bullish. Their impact on the price per barrel is real. Especially since that investment policy leads to inverse flexibility in terms of demand: the more the price of oil goes up, the more must be bought for the portfolio’s exposure to oil to remain stable.
So hedge funds are not the ones driving up the prices?
No, the speculative premium is linked to the financial players’ diversification policy. If they were to decide today to allocate 1% of U.S. share assets to commodities, open positions at New York in futures oil contracts would double. In this context, the Goldman Sachs hypothesis that oil will swiftly rise to more than $200 would certainly come true.
Has a speculative bubble developed on the oil market?
I grant you that there is something like a bubble. Nowadays it is possible to trade in oil, heating oil, petrol, diesel and gas ETFs. The situation reminds me somewhat of Nasdaq in the late nineties with the advent of day traders. Internet chat rooms are rife with commentaries and advice on how to make good deals. But I am divided in my opinion. I am not sure that the bubble is about to burst.
Why?
To realize that a speculative bubble is developing is one thing, but to know just when it will burst is another. In 1987 the situation on the Japanese Nikkei, which culminated at 25,000 points, seemed clear. In retrospect, those who bet on a fall were right: Japan’s index is now close to 14,000 points. Yet that didn’t stop it from rising to 39,000 points in 1989…
Has oil extraction reached its peak?
Peak oil has become an over-important subject of debate. There’s enough crude down there for a long time to come. Technology will enable more and more to be extracted from known wells, whereas the maximum recoverable at present is 50%. So there’s still scope. The real problem is that too little has been invested in the oil sector in recent decades, either in exploration, extraction or refining.
With oil at $130 a barrel, aren’t the oil giants investing heavily?
No, not aggressively enough. The hypotheses on which their investments are based are too conservative. The crude is there, but the oil industry is demanding returns of 15% to 20% to extract it. That’s very high. The major companies are calculating on a long-term crude oil price of $60 to $80 per barrel, whereas the futures price curve comes close to $130.
Are new players stepping into the breach?
Yes, the number of small producers is growing. Incidentally, we have taken this opportunity and are extracting oil in Canada and the United States.
Can the short-term demand for oil be met?
No, not necessarily. Economic experts forecast a global growth of about 3.7% in 2008. This would mean a rise in the daily oil demand from 87 million barrels today to almost 89 million barrels twelve months hence. I am not sure that these additional barrels will be easy to find.
Really?
Yes. The decline in production at known sites – in the North Sea, the United States or Russia – is accelerating. In Saudi Arabia, it has reached its limit! For the past ten years China’s growing needs have been met by Russian supplies; this will not be the case in future.
Is this due solely to inadequate investments by oil groups?
No, the nationalization of energy resources is worrying. This applies to South America, Russia and Africa alike. In Venezuela, production has fallen as a result of the PDVSA petroleum company’s loss of independence. The departure of management staff with sound experience in oil extraction and exploitation has proved harmful.
Won’t the high price ultimately reduce the thirst for oil?
Unfortunately, the elasticity of demand is low. Automobiles account for over 40% of oil consumption. It will take time and huge investments to create valid alternatives.
And nuclear power?
Nuclear power is the only credible alternative to petroleum that can be put in place rapidly, and which moreover has the advantage of settling the problem of CO2, the notorious greenhouse gas.
Translated from the French for Mercuria by Patricia Colberg
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