prices: Speculators hijack the oil market (by ROBERT WINNETT)|
A LARGE warehouse in
Amsterdam may seem an unusual place to attract the City’s top
traders and hedge funds. But, in the past few months, Morgan Stanley
has been accumulating warehouse space in the Netherlands to store
its hottest new property — oil.
This and the tankers that
have been hired by the investment bank illustrate just how important
oil is now becoming in the City of London and Wall Street. Morgan
Stanley may be among the most advanced of the new breed of oil
speculators, but, over the past year, many banks and hedge funds
have joined the “black gold rush”. With the stock market proving
lacklustre, the oil market has been a godsend for the banks,which
describe it as the “new Nasdaq”.
Speculators have helped to
drive oil prices to near record levels — peaking at almost $50 a
barrel last month. Oil is the talk of the City with many millions of
pounds being made every day, and oil traders are among the most
“If you can spell derivative, you can
earn six figures,and anyone who can navigate his way round the oil
market is offered $1m just to sign a contract,” said one trading
executive. There have traditionally been two distinct oil markets.
The first is the futures markets in London and New York that trade
the right to buy oil at a predetermined point in the future. About
one-sixth of all oil is sold this way, although most contracts are
traded and then lapse without oil changing hands.
“paper” market, the main stamping ground for speculators, acts as a
benchmark for the price of oil in the second market — crude bought
direct from oil companies. If prices on the futures market rise too
far above the so-called physical market, oil users such as airlines
and petrol dealers pull out, so prices fall. If prices on the
futures market are lower than in the physical market, the users pile
in, pushing up prices.
However, this traditional equilibrium
has been rocked by short-term speculators dipping in and out of the
futures market. This has led to sharp rises in the price and far
more volatility. Meanwhile, banks such as Morgan Stanley are also
beginning to move into the physical market to buy oil — or even
Morgan Stanley recently won the contract to
supply fuel to United Airlines, and Goldman Sachs recently bought
10m barrels of oil. A senior oil company executive said: “Even
within this firm, the mechanics of the market are not widely
understood. When oil prices go up, everyone talks about fundamentals
and geopolitics, but the role of speculators and banks is now very
In the City, Barclays, Morgan Stanley and
Goldman Sachs are leading the charge into oil but, in addition,
several secretive hedge funds are now wagering hundreds of millions
of dollars every day in the oil market and reaping the dividends.
Over the past few months, ABN Amro has also built up an oil-trading
team. “We have a database of about 300 people in London who are
capable of trading oil so, as you can imagine, they are very highly
desired,” said one bank executive.
However, consumers and
businesses are paying the price of the speculators’ profits with
higher petrol, energy and air travel bills. Last month, British Gas
increased its prices sharply as a result of higher oil prices.
Npower followed suit last week.
Nationwide building society
calculates that the impact of higher oil prices on households is the
same as a quarter-point rise in mortgage costs.
International Energy Authority, an intergovernmental organisation,
recently criticised the role of speculators. They have also been
attacked by French and American government ministers. Alan
Greenspan, chairman of America’s Federal Reserve Board, said that
speculators had caused oil prices to “surge”.
analysis of the market carried out by a big European oil company
recently found that speculators were adding between $7 and $8 — or
between 15 and 20 per cent — to the price of a barrel of oil. This
month, rocketing petrol prices forced Gordon Brown, the chancellor,
to delay a proposed increase in fuel duty.
A senior executive
at one oil firm said: “This is the hottest oil market I have ever
seen. There has been a massive increase in hedge-fund activity. And
what we call non-commercial interests [those who do not use oil for
their business] has doubled recently.
“A lot of new banks
are coming in and all the speculation is very disruptive.” Much of
the trading by hedge funds has been driven by sophisticated
computer-trading models. The models, known as “black boxes”, use
complicated formulas to determine trades for a hedge fund.
Over the past few years, a number of hedge funds have added
the oil markets to their trading systems as the price of oil tends
to rise sharply after periods of strong economic growth. Hedge-fund
insiders therefore say that oil is an excellent short-term
The sharp rises and falls in the market over the past
month are symptomatic of such computer-generated trading. Prices
rose sharply to almost $50 a barrel, at which point the computers
kicked in to automatically sell huge positions.
the computer trading models kicked in again to cause the biggest
daily fall in oil prices for three months — a drop of 4 per cent to
$42.81 a barrel.
Jeffrey Currie, head of commodities
research at Goldman Sachs said: “The number of speculators is
typically correlated with high economic growth. They work off
macro-economic trading models.
“Equities are anticipatory
assets — you buy them when you expect the economy to do well — but
commodities such as oil are spot assets that you buy when the
economy has done well.”
Man Group’s AHL hedge fund and Aspect
Capital Management are two of the London-based funds that have moved
heavily into oil.
Stephen Butler, an oil expert at Aspect,
said: “We are one of the biggest in Europe and have built up our
exposure over the past 18 months. We probably have up to $250m
(£140m) exposure a day on the London and New York
“Our trading is determined by computer so we don’t
have the emotional factor. It has worked well on the energy markets
and has been one of our best-performing sectors.”
from the short-term speculators, the investment banks have also
identified a looming “oil crunch”, which has encouraged them to move
aggressively into the market.
Goldman Sachs calculates that
for the first time this year demand for oil will outstrip the
world’s capacity to refine and distribute it.
Vitry, head of commodities at Barclays Capital, said: “The oil
system has cracked. There is a lack of refinery and distribution
capacity. The spare capacity is now down to 1m barrels a day. People
are not worried about having their meal on the table today, but
fears are growing about the future.”
According to Goldman
Sachs, the capacity of oil tankers and oil refineries has been
dropping since the early 1980s because of a lack of investment, and
the crunch will come this year. Since 1983, real spending on
exploration and production of energy has fallen by 49.5 per cent. To
build the extra infrastructure that is required will take years,
possibly more than a decade, to complete.
Energy Agency forecasts that over the next 30 years the energy
industry globally will require $16,000bn in new investment to catch
up — and it is not clear where this money will come
Apart from the oft-quoted, short-term oil price, there
is also a lesser-known market in long-term oil futures — the right
to buy oil in five years’ time. This has traditionally been a rather
staid market, and the price of a barrel of oil in the long-term
market has been around $20 for most of the past 20 years. However,
over the past 18 months, the price has rocketed to $35 a barrel as
the speculators have moved in.
The bleak, long-term outlook
for oil prices is also why banks have begun to buy up oil supplies
directly. Morgan Stanley and Deutsche bank recently bought the
rights to 36m barrels of oil between 2007 and 2010 direct from a
North Sea oilfield.
The pattern of supply and demand for oil
this decade is also undergoing a fundamental change. The countries
that make up the Opec oil cartel — in particular Saudi Arabia, the
world’s biggest supplier — have young populations and the cost of
their public services is burgeoning. On average, the nine Opec
nations are expected to need to charge at least $31 per barrel to
avoid government budget deficits over the next
Meanwhile, demand for oil is booming. Since 1980, the
consumption of oil has risen by an average of 1 per cent a year.
However, this year, consumption worldwide has risen 3.2 per cent as
a result of soaring demand in China. During 2003, China’s use of
fuel oil rose by 22 per cent , while its use of crude oil and petrol
rose 10 per cent.