Wednesday, September 10, 2008

Oil price speculation: Masters back on the attack

From FT Alphaville:

Hedge fund honcho Michael Masters is at it again in his continuing onslaught against commodity index investors, primarily big investment banks, who Masters – and what seems to be most of US Congress - blame for record oil prices.

In a report due out later Wednesday, Masters, president of the Masters Capital Management hedge fund, says commodity index investors sold $39bn worth of oil futures between their July record and Sept 2, causing crude to plunge, reports Bloomberg on Wednesday .

His timing is good for, even as oil prices are way down from their July highs, commodities speculation is coming back into the spotlight, with the US Commodity Futures Trading Commission set to issue its own report Thursday on the impact of index investors and OTC trading on commodities, and discuss its study with a congressional committee, notes Bloomberg....

...“Just as weather forecasters have no effect on the weather, energy speculators have no effect on the price of oil,'’ Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents investors, told Bloomberg. “His fallacy is that he ignores the laws of supply and demand, which determine the price of oil.”...MORE

Blah, blah, blah.I'm in Masters' corner. Not because I'm so knowledgable but because Paul Tudor Jones and Wilbur Ross* are and they both said it was a bubble. And because I know the trader mentality. And human nature.

Just to be clear, in commodities, speculators are necessary. They perform a societal good by taking the other side of a hedgers trade. The problem is the so-called index investors. Along with their enablers, the big investment banks who sold swaps as a way around the speculative position limits and who now risk losing their designation as commercials. It will be interesting to see what CalPERS results are when they report next month and how sincere they are about maintaining their long-term commitment to the "asset class".

From the Bloomberg story:

...``I don't think it's just coincidence that the money came out after the pressure was put on these folks,'' Masters, who wants legislation that would set limits on index commodity holdings, said in an interview.

Crude oil futures surged to a record $147.27 on July 11, an increase of 53 percent for the year, on the New York Mercantile Exchange, then fell 26 percent to $109.71 on Sept. 2. Oil dropped $3.08 to $103.26 yesterday on the Nymex.

``The speculators that drove prices up basically deflated the bubble,'' said Fadel Gheit, director of oil and gas research at Oppenheimer Capital in New York. ``They said, `That's it, the game is over. We are going to bet on another horse.'''..

*Wilbur Ross: Run-Up in Oil Prices Is a Bubble

Seeing Oil Bubble, a Contrarian Bets on an Indian Airline

Paul Tudor Jones on Oil