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A massive jump in the price of oil this week has raised new concerns about the role of speculators and possible market manipulation, but traders say the historic surge had more to do with "stupidity" or poor risk management.
Oil took a wild ride Monday, surging more than $25 (U.S.) a barrel in the last few minutes of trading on the New York Mercantile Exchange. The price for the October contract, which expired Monday, soared as high as $130, before settling at $120.92, up $16.37. That was the largest one-day gain ever. Oil closed down yesterday to $106.61 for the November contract, but Monday's action prompted an investigation by regulators who have begun subpoenaing trading records. It also sparked a new round of complaints from politicians who blame speculators for driving up the price of oil and gasoline. "We've had hearing after hearing on this," North Dakota Senator Byron Dorgan told industry officials during a congressional committee hearing on gas prices yesterday. "We've had all the experts come, who have an interest in saying there is no speculation, tell us 'there is nothing going on, don't believe your own eyes.' " Mr. Dorgan criticized officials from the U.S. Energy Information Administration, which provides statistics on the energy market, for discounting the role of speculators. He also said the EIA has been consistently wrong in its price forecasts. Howard Gruenspecht, who runs the EIA, said the agency still believes market fundamentals drive oil prices but he acknowledged Monday's trading was extraordinary. "It probably reflects some kind of trader activity," he told the committee. "The other option, frankly, is manipulation." Traders doubted the price rise was manipulation. They said it was owing to some unusual events that caught short sellers offside. Typically, in commodity markets, a "short seller" is someone who sells a future contract, essentially promising to deliver a certain amount of a good, on a certain date, for a certain price. Those who buy the contract are in the "long" position and usually want the commodity. Short sellers are betting the price of the commodity will fall. If it does, they buy a contract at the lower price before the expiry date, close their position and pocket the difference. Those on the "long" side hope the price increases. If it does, they can either buy a higher-priced contract from a short seller and pocket the difference, or take actual delivery at the lower price specified in their contract. According to traders, at least one large energy company began quietly buying contracts last week. The company needed oil and it knew supplies had tightened in the wake of hurricanes Gustav and Ike. On Monday, the October oil contract was set to expire at the end of trading. Oil prices had gone up about $15 over the previous few days, reflecting the buying by the oil companies. As the day went on, short sellers began frantically trying to buy contracts to close out their positions. If they didn'tclose their positions, the short sellers would have to buy oil on the open market to fulfill their contract. However, the oil company holding the contracts did not want to sell because it needed the oil. By late afternoon, short sellers were forced to bid up the price dramatically in order to pry contracts away from oil companies. "It was a squeeze," said Stephen Schork, who writes an energy trading newsletter in Virginia. "I'd be surprised if this was manipulation. It had more to do with either poor risk management or just plain stupidity." One problem flowing from the price rise could be pressure on investors to meet margin calls. In order to buy a futures contract, investors must put up certain amount of money, or margin, as a guarantee. If the market price goes against the contract - for example, if market prices rise and the investor is holding short contracts - the investor must put more money into the margin account. The amount is set daily. The huge price jump Monday likely led to big margin calls, Mr. Schork noted. That can be crippling. Even as crude oil prices began their rise last week, gas prices across Canada fell 16.3 cents (Canadian) to $1.215 a litre, according to a study by Calgary-based consultancy MJ Ervin and Associates. Prices at the pump followed those of the wholesale gasoline market, which also fell. Refineries are producing more gasoline after hurricane Ike drove up prices, while demand is slackening as the "driving season" ends. "I wish this would put paid to the perception that prices at the pump follow those of crude [futures] - they never have," MJ Ervin president Michael Ervin said. "They're responding to wholesale gasoline prices, which are down because of the restoration of inventories and lower demand." |