What's causing it? Energy traders and economists will tell you that the price decline is being driven by slowing oil demand growth in emerging markets, combined with real, year-over-year demand reduction in the world's biggest market, the United States.
Investors exit oil
But that's not the whole story behind oil's stunning drop from $147 to the $60-per-barrel-range, so says Energy Trader Jim Dietz. Dietz who argues that the global reduction in the availability of leverage -- money borrowed for use in trading -- has taken a considerable amount of the buying pressure out of oil, as well as other commodities.
"We clearly are not seeing as many hedge funds and investment funds establishing positions in oil, and the ones who are in the market are establishing smaller positions," Dietz said. "As a result we rarely see any more powerful moves to the upside with powerful momentum characteristics. I'm not saying hedge fund buying is the only reason oil hit $147 this summer, but they certainly played an important role."
Zachary Oxman, a senior trader at Wisdom Financial, agreed. "Without hedge funds to push it around, crude has had a hard time putting in rallies and with the new administration looming large, oil seems to be finding comfort in the low 60's," Oxman told MarketWatch Thursday. Oil closed Friday up 24 cents to $61.04 per barrel.
Dietz now believes an oil bubble existed at/above $100 per barrel "and is being deflated to this day," arguing that even oil at $60 per barrel "is still a very high price for oil, historically," and historical evidence oil bears him out. Logically, then, if hedge funds / investment funds played a role in oil's $147 price, and that price represented a bubble -- an artificially high price, then hedge / investment funds helped to artificially boost oil's price.
Moreover, they artificially boosted not a typical product, Dietz says, but the world's most important commodity, to the economy's detriment.
"Take the housing bubble argument and graft it on to the oil market," Dietz said. "Would anyone argue now that the ridiculous prices for homes during the housing boom benefited the economy? No, they've caused enormous economic harm via distortions, and now policy makers are implementing reforms that will prevent those distortions from occurring again. We're still early in the analysis, but it looks like the oil boom had similar characteristics with just as damaging distortions and economic damage."
Oil / Economic Analysis: Food for thought, from traders Dietz and Oxman. It now appears leverage, along with margin requirements, played a role in the tidal wave of financial institutions that entered the oil trading market, and oil's surge to unprecedented heights, but it's best that Congress systematically study the matter. Further, if the study confirms Dietz's argument, then it's time to both increase margin requirements and limit leverage, among other reforms. As of now, it looks like hedge and investment funds, via their sheer size and leverage, did not provide essential liquidity to the oil market: they simply artificially boosted the price of oil -- to the detriment of the U.S. and global economies.
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Reader Comments (Page 1 of 1)
11-10-2008 @ 3:46PM
beachpaul said...
You shouldn't be able to buy oil futures unless you are taking delivery. What is a hedge fund doing in the oil business? Oh, let me guess.
11-10-2008 @ 4:50PM
BILL said...
seems to me like big business and our government still screwing the little guy.now the little guy is forced into bailing out big business because a government who cares little about its people have said so. how about impeachment of all those in office. lets start over with people with integrity and prosecute all those in office who have helped to create this mess. that includes big business as well .the hanging tree is ready .
11-13-2008 @ 3:22PM
BILL said...
seems to me like big business and our government still screwing the little guy.now the little guy is forced into bailing out big business because a government who cares little about its people have said so. how about impeachment of all those in office. lets start over with people with integrity and prosecute all those in office who have helped to create this mess. that includes big business as well .the hanging tree is ready .
11-10-2008 @ 6:16PM
Steve said...
I've thought and I'm pretty sure alot of others have too that thats been going on for some time. You have to wonder about any trader or ANY other leader that just finally came out of the closest on this one - WOW it really does take some people time to get it ! Of course now that they are not making there BIG returns they they can say so - Proud of em !