The Other Senate Hearing: Speculating And The Price Of Oil
CNBC viewers have been glued to the Senate Banking Committee's hearing on Bear Stearns all day (unless you turned the channel and as loyal viewers you'd never do that right?).
Meanwhile there's been another feisty hearing underway on Capitol Hill as the Senate Energy and Natural Resources Committee tries to examine the impact of "speculative" investors on the price of oil.
One of the most striking comments came from Jeffrey Harris, chief economist of the Commodity Futures Trading Commission (the primary federal agency charged with regulating energy futures and options) who said: "There is little evidence that changes in speculative positions are dramatically driving up crude oil prices."
What is he talking about? Yes, China and India have increased their oil consumption over the past few years and the dollar has weakened sharply (two factors that Harris cited.) But here in the U.S., oil supplies have increased nearly 13 percent since the beginning of the year.
The Energy Department reported yesterday that at 319.2 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Meanwhile, total product demand over the past four weeks is down1.3 percent compared to the same period a year ago. There's plenty of oil and we're not using it all. So why are oil prices over $100, having averaged the mid to high-$90 range all year long?
Tom Kloza, chief oil analyst at OPIS, studied the issue of possible oil price manipulation a few weeks ago. Looking at the positions of non-commercial traders (whether speculators or investment vehicle, like commodity funds), he found that at that time, there was approximately $25 billion MORE money being bet on a higher price outcome than a lower price outcome. Says Kloza:
"It may be unfair to call this speculation when some of it is investment. But this is not the oil industry or the large end-users at work here. The financial entities, whether they be commodity pools, hedge funds, spread traders, etc. are to 2007-2008 oil prices what steroids have been to batting statistics in the 21st century."
Lawmakers on the committee weren't buying Harris' argument either. Senator Byron Dorgan, the Democrat from North Dakota, summed it up like this: "There's an orgy of speculation in the futures markets," he said. "This is a 24-hour casino with unbelievable speculation." And likely a lot of high-rollers (and regular retail investors who've jumped on the oil ETF bandwagon) who'll stand to loose a bundle when and if this market comes tumbling down.
(Look here for Tom to comment more on "speculators" and the rising price of oil in this space on Monday. We welcome him to the EnergySource as our Special Guest Blogger.)
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