OPEC Calls for Curbing Oil Speculation, Blames Funds

Date: Wednesday, January 28, 2009
Author: Maher Chmaytelli, Bloomberg.com

OPEC wants U.S. regulators to curtail oil trading by hedge funds and speculators who helped make last year the most volatile in crude oil markets.

Abdalla el-Badri, secretary-general of the Organization of Petroleum Exporting Countries, is seeking rules to “limit the level of speculation” by investors who buy oil without planning to use it. Oil surged 46 percent in the first half of 2008 to a record $147.27 only to plunge by the end of the year, prompting OPEC to make its biggest ever supply cuts.

“OPEC has repeatedly called for the need to reduce the role of excessive speculative activity in the market,” el-Badri, who will attend this week’s World Economic Forum in Davos, Switzerland, said in an e-mailed response to questions. “Today, it is impossible to know who is actually buying and selling oil futures.”

While U.S. congressional leaders proposed legislation to curtail speculation as rising oil caused gasoline to reach $4 a gallon last summer, regulators at the Commodity Futures Trading Commission are divided over the role of hedge funds in last year’s surge in prices. A series of OPEC supply cuts failed to boost prices as demand weakened in what may be the worst global recession in the postwar era.

“The move above $90 a barrel was driven by financial flows rather than fundamentals” of supply and demand, said Edward Morse, chief economist at Louis Capital Markets in New York. Selling by speculators “helped propel the commodities price downturn, but fundamentals have weighed heavily as well.”

Davos Panel

Oil and copper led a rout last year among most metals, industrial and agricultural commodities, save gold.

El-Badri said he plans to raise the issue of increasing transparency in energy markets at a session tomorrow in Davos that discusses whether “long-term investment strategies are reshaped by short-term energy economics.” Tony Hayward, the chief executive officer of London-based BP Plc and Ilham Aliyev, the president of Azerbaijan, an oil exporting nation, are on the same panel.

So-called net-long positions in New York crude futures by hedge funds and other large speculators betting on higher prices peaked at 115,145 contracts in March, according to data from the CFTC. They switched direction in July to a net-short position, or wager against prices, which reached 52,984 contracts by mid- November, the CFTC data show.

Trading Rules

Legislation to limit speculative trading was approved by the U.S. House of Representatives in September though the Senate failed to bring its version to a vote. A Sept. 11 CFTC staff report found no correlation between rising oil prices and the role of index fund investors and securities firms.

President Barack Obama has yet to comment on the need to rein in commodity traders.

“I have little confidence in a view that shorting the market, short selling, will somehow be banned” for oil, Mike Rothman, head of oil research at International Strategy & Investment Group in New York, said in an interview last week. “It’s a basic market function which makes be believe it will be virtually impossible to stymie.”

Oil futures traded 44 cents up at $42.02 a barrel on the New York Mercantile Exchange at 10:23 a.m. London time, down 71 percent from last year’s record. Prices fell 6 percent this year.

Interest from speculators has rebounded, with the number of barrels owned by active speculators, index funds and other investors only 13 percent lower than when it was when oil prices peaked in July, Goldman Sachs Group Inc. analyst Jeffrey Currie in London said in a report yesterday.

‘Extreme’ Prices

Trading volume in New York rose to a record last year. The number of contracts bought and sold averaged almost eight times daily global oil production in 2008, up from three times in 2005, according to Olivier Jakob, managing director of Zug, Switzerland-based PetroMatrix AG, an energy market consultant.

“Even if we look back at 1998 and 1986, we’ve never had this violent a shift at this extreme in terms of prices,” said Daniel Yergin, chairman of Cambridge Energy Research Associates Inc., referring to previous bear markets. Yergin will also be attending the forum in Davos, as will Jeroen van der Veer, chief executive officer of The Hague-based Royal Dutch Shell Plc.

OPEC blamed speculators for last year’s record surge, saying that it was supplying enough oil to meet demand.

World consumption will fall for a second year in 2009, the first back-to-back contraction in 25 years, according to the Paris-based International Energy Agency.

Transparency

While OPEC complains about the lack of transparency, the group itself no longer publishes production targets for individual nations and doesn’t trust its members own assessments of their production, instead relying on third-party estimates.

El-Badri said in the e-mailed statement to Bloomberg last week that OPEC and the IEA are trying to improve market data with their Joint Oil Data Initiative, which collects energy information from more than 90 countries.

Saudi Arabia wants oil at $75 a barrel, a level that it says is appropriate to drill in deep waters and in Canadian oil sands. Libyan leader Mummar al-Qaddafi wants oil at $100 to help pay for infrastructure projects.

In West Africa, “deep-water oil is expensive and at risk of being deferred at current oil prices,” Nigerian Petroleum Minister of State Odein Ajumogobia said at an oil exploration conference in Abuja yesterday.

“As oil demand is now skewed to the downside, there are major question marks hanging over our longer-term investment plans,” said el-Badri, a 68 year-old former Libyan oil minister who was appointed to OPEC’s senior permanent position two years ago. “It is essential that we have some clear indication on future oil demand.”

To contact the reporter on this story: Maher Chmaytelli in Davos via the London newsroom at 2166 or mchmaytelli@bloomberg.net.