Does it seem as if the price of oil has been unusually volatile lately? Today, it rose nearly 2% a barrel, while earlier in the month it dropped to 19-month lows. Throughout history, speculators have moved the commodities market, but is there more going on now than meets the eye? On today’s “Power Lunch” CNBC’s Sue Herera found out that the current volatility in oil might actually be a consequence of hedge funds and indirectly--the demise of Enron.
Some investors believe that hedge funds are responsible for the sometimes erratic swings in the price of oil. Peter Fusaro, Chairman at Global Change Associates as well as Co-Founder of Energy Hedge Fund Center was one of the first to notice. “We are now tracking over 530 energy hedge funds and 130 commodity hedge funds,” he said. “They are exacerbating price volatility on an intra-day basis.”
“We seen a big rise in the number of hedge funds and speculators in this market,” agreed Leo Mariani, Senior Equity Analyst for RBC Capital Markets. “It’s just been a very large increase in the past several years. At this point in time these guys are controlling about 40% of the trades on the NY Mercantile Exchange. Clearly they have contributed to the volatility quite a bit.”
Fusaro believes that the Enron scandal was likely responsible for this phenomenon. “The talent came from Enron and the demise of Energy Merchant, (that’s the utility that stopped trading.) So we had this energy trading talent that was attracted to investment banks and hedge funds. Without that talent and knowledge base you wouldn’t have this kind of trading.”
Does that mean hedge funds, alone, are to blame? Hardly, explained Fusaro. There are actually 4 ingredients and it's all about how they blend. “The bouillabaisse of the energy market is weather, supply and demand, geo-political factors (i.e. unrest in the Mid-east) and then hedge funds."