Don’t Blame The Speculators Alone
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Don’t Blame The Speculators Alone

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    Don’t Blame The Speculators Alone Don’t Blame The Speculators Alone Presentation Transcript

    • DON’T BLAME THE SPECULATORS ALONE Presented By RAMYA KRISHNAMURTHY (76) SONICA DALMIA (95)
    • WORLD VIEWS ON OIL PRICES
      • American Politicians – “Finger speculators for feverish rise in oil prices”
      • OPEC – “Speculation driving oil prices”
      • Italian Finance Ministry – “Magnum of speculative champagne included in the price of each barrel”
      • Austria – “European Union must impose tax on speculation”
      • Saudi Arabia & Other big Oil Producers – “Prices are to be blamed on frothy markets rather than idle wells”
      • International Energy Agency – “ Supply and Demand and not speculation drive oil prices”
    • SUMMARY: KEY TAKEAWAYS
      • As the price of crude oil has continued to hit new record highs, many investors have questioned whether the gains are justified by supply-demand conditions or are the result of investor speculation.
      • The largest driver of crude oil prices in 2008 appears to be the growing recognition of long-term supply constraints, as the production at some of the world’s largest oil fields has matured while new discoveries have been smaller and costlier to develop.
      • Investor interest in oil has played a role in pushing prices up in the relatively small oil futures market, but it is impossible to calculate to what extent these investments represent near-term speculation or a reaction to the long-term supply – demand outlook.
      • The five-year increase in crude oil prices is the fastest ever, has contributed to a fall in U.S. gasoline demand, and presents a growing challenge to the global economy.
      • With increasing recognition that the world’s era of “cheap oil” may have come to an end, a meaningful and sustainable decline in oil prices may only be possible in the near-term if demand growth decelerates in fast-growing developing markets, such as China and Saudi Arabia.
      • Discoveries of large, low-cost oil fields have been increasingly rare.
      • The relatively small market capitalization of crude oil futures means investor moves can result in big price swings.
      • U.S. consumer spending on energy reached 20 year highs, though it still has remained below early-1980s peaks.
      • Oil price is only “Speculation”.
      • Follow the oil, not the futures.
      • It takes two to Contango.
      SUMMARY: INSIDE
    • SUPPLY CONSTRAINTS INCREASINGLY EVIDENT
      • Growing demand and continuously rising oil prices in recent years have failed to spur a significant increase in crude oil production, leading to growing recognition that future supply growth may be lower than anticipated
      • With few new discoveries of giant, low-cost fields since the 1980s, future supplies are increasingly dependent on maturing older fields and smaller new discoveries
      • Incremental oil output costs more
        • Smaller oil fields are generally more costlier
        • Discoveries have tended to be of lower quality and tend to be located in less-accessible places
      • Production growth has been constrained by government intervention and instability
      SUPPLY CONSTRAINTS INCREASINGLY EVIDENT
    • RELATIVELY SMALL CRUDE OIL MARKET SUSCEPTIBLE TO LARGE PRICE SWINGS
    • RELATIVELY SMALL CRUDE OIL MARKET SUSCEPTIBLE TO LARGE PRICE SWINGS
      • The total market capitalization of crude oil futures is relatively small (less than half of the size of Exxon Mobil—the largest U.S. oil company).
          • rising investor interest in oil can contribute quickly to disproportionately large price swings.
      • It is difficult to gauge whether the recent surge of investment in oil is “speculative” or driven by growing recognition of tight supply/demand conditions
          • new investment in crude oil markets is coming from institutional investors, that typically have long investment horizons.
          • In addition, a tighter long-term supply-and demand outlook provides motivation for countries to build inventories
    •  
    • US CONSUMER SPENDING ON OIL ROSE TO 20-YEAR HIGH
      • Consumer spending on energy—for transportation and home operations—hit a two-decade high in March 2008, both as a percentage of consumer spending and income
          • At 6.4% of disposable personal income, energy takes up a greater share of household earnings than at any point since 1985.
          • Energy accounted for 6.6% of consumer spending—its highest level since 1986.
      • There have been some signs that prices are beginning to curb demand growth in the U.S.
          • In March, miles traveled on U.S. roads fell 4.3% on a year-over-year basis, the first decline since 1979 and the steepest fall on record.
      • However, developing countries—including China and Saudi Arabia—continued to account for the bulk of global demand growth
    • OIL PRICES ARE ‘ALL’ SPECULATION
      • Government has strong views on commodity market speculation; introduced ‘Commodity Speculation Reform Act, 2008’
      • Supply and Demand cannot lead to sudden rises; there are more contracts than barrels
      • From 1998 to 2008 the share of ‘long interests’ - market positions that benefit when prices rise – in commodities held by financial speculators has gone up from 1/4 th to 2/3 rd of the commodity market
      • From 2003 to 2008, investments in index funds tied to commodities has grown twenty-fold from $13 billion to $260 billion
    • FOLLOW THE OIL, NOT THE FUTURES
      • Barclays Capital calculates that “index funds” account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption
      • Neither speculators nor index funds buy physical oil; instead ‘place bets’
      • No oil is held back from the markets making these bets like bets on a football match
      • If speculators managed to push prices to unjustified heights, demand would contract leaving unsold pools of oil
      • “ All producers bar Saudi Arabia are pumping oil as fast as they can”
      • Price rise through speculation will either cause demand to fall or stockpiles to rise; neither has happened
    • IT TAKES TWO TO CONTANGO
      • Speculators help airlines and other big consumers to hedge against rising prices, and so to reduce risk – a massive boon amid the economic turmoil
      • Provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply
    • Reference
      • The Economist (July 5 th 2008).
      • The Analyst (June 2008).
      • Wikipedia.
      • Forex News.
      • International Energy Agency Report.
      • Staff Report, Senate Permanent Subcommittee on investigation committee on homeland security and government affairs.
      • CNN Money.com
    • THANK YOU