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Don’t Blame The Speculators Alone


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Don’t Blame The Speculators Alone

  2. 2. WORLD VIEWS ON OIL PRICES <ul><li>American Politicians – “Finger speculators for feverish rise in oil prices” </li></ul><ul><li>OPEC – “Speculation driving oil prices” </li></ul><ul><li>Italian Finance Ministry – “Magnum of speculative champagne included in the price of each barrel” </li></ul><ul><li>Austria – “European Union must impose tax on speculation” </li></ul><ul><li>Saudi Arabia & Other big Oil Producers – “Prices are to be blamed on frothy markets rather than idle wells” </li></ul><ul><li>International Energy Agency – “ Supply and Demand and not speculation drive oil prices” </li></ul>
  3. 3. SUMMARY: KEY TAKEAWAYS <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
  4. 4. <ul><li>Discoveries of large, low-cost oil fields have been increasingly rare. </li></ul><ul><li>The relatively small market capitalization of crude oil futures means investor moves can result in big price swings. </li></ul><ul><li>U.S. consumer spending on energy reached 20 year highs, though it still has remained below early-1980s peaks. </li></ul><ul><li>Oil price is only “Speculation”. </li></ul><ul><li>Follow the oil, not the futures. </li></ul><ul><li>It takes two to Contango. </li></ul>SUMMARY: INSIDE
  6. 6. <ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>Incremental oil output costs more </li></ul><ul><ul><li>Smaller oil fields are generally more costlier </li></ul></ul><ul><ul><li>Discoveries have tended to be of lower quality and tend to be located in less-accessible places </li></ul></ul><ul><li>Production growth has been constrained by government intervention and instability </li></ul>SUPPLY CONSTRAINTS INCREASINGLY EVIDENT
  8. 8. RELATIVELY SMALL CRUDE OIL MARKET SUSCEPTIBLE TO LARGE PRICE SWINGS <ul><li>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). </li></ul><ul><ul><ul><li>rising investor interest in oil can contribute quickly to disproportionately large price swings. </li></ul></ul></ul><ul><li>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 </li></ul><ul><ul><ul><li>new investment in crude oil markets is coming from institutional investors, that typically have long investment horizons. </li></ul></ul></ul><ul><ul><ul><li>In addition, a tighter long-term supply-and demand outlook provides motivation for countries to build inventories </li></ul></ul></ul>
  9. 10. US CONSUMER SPENDING ON OIL ROSE TO 20-YEAR HIGH <ul><li>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 </li></ul><ul><ul><ul><li>At 6.4% of disposable personal income, energy takes up a greater share of household earnings than at any point since 1985. </li></ul></ul></ul><ul><ul><ul><li>Energy accounted for 6.6% of consumer spending—its highest level since 1986. </li></ul></ul></ul><ul><li>There have been some signs that prices are beginning to curb demand growth in the U.S. </li></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><li>However, developing countries—including China and Saudi Arabia—continued to account for the bulk of global demand growth </li></ul>
  10. 11. OIL PRICES ARE ‘ALL’ SPECULATION <ul><li>Government has strong views on commodity market speculation; introduced ‘Commodity Speculation Reform Act, 2008’ </li></ul><ul><li>Supply and Demand cannot lead to sudden rises; there are more contracts than barrels </li></ul><ul><li>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 </li></ul><ul><li>From 2003 to 2008, investments in index funds tied to commodities has grown twenty-fold from $13 billion to $260 billion </li></ul>
  11. 12. FOLLOW THE OIL, NOT THE FUTURES <ul><li>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 </li></ul><ul><li>Neither speculators nor index funds buy physical oil; instead ‘place bets’ </li></ul><ul><li>No oil is held back from the markets making these bets like bets on a football match </li></ul><ul><li>If speculators managed to push prices to unjustified heights, demand would contract leaving unsold pools of oil </li></ul><ul><li>“ All producers bar Saudi Arabia are pumping oil as fast as they can” </li></ul><ul><li>Price rise through speculation will either cause demand to fall or stockpiles to rise; neither has happened </li></ul>
  12. 13. IT TAKES TWO TO CONTANGO <ul><li>Speculators help airlines and other big consumers to hedge against rising prices, and so to reduce risk – a massive boon amid the economic turmoil </li></ul><ul><li>Provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply </li></ul>
  13. 14. Reference <ul><li>The Economist (July 5 th 2008). </li></ul><ul><li>The Analyst (June 2008). </li></ul><ul><li>Wikipedia. </li></ul><ul><li>Forex News. </li></ul><ul><li>International Energy Agency Report. </li></ul><ul><li>Staff Report, Senate Permanent Subcommittee on investigation committee on homeland security and government affairs. </li></ul><ul><li>CNN </li></ul>
  14. 15. THANK YOU