Monday, August 23, 2004

More on the hedge funds driving oil toward $50/barrel, from today's WSJ (sub. only).
Enron alumnus John Arnold now runs a $600 million Houston-based hedge fund, Centaurus Energy LP, which has racked up more than $200 million of profits in the past year alone thanks to big bets on oil and natural gas, according to investors. Oil-industry veteran Boone Pickens runs two hedge funds that are among the biggest players in oil and natural gas, and have scored gains of more than $550 million in the past two years. Giant hedge funds, including Paul Tudor Jones's $9 billion Tudor Investment Corp and D.E. Shaw & Co., an $8 billion firm, also have scored big gains. . . .

The investors have been betting on higher prices. As of last week, noncommercial investors, which include hedge funds and similar investment entities, made about 28% of all futures bets on higher crude-oil prices at the New York Mercantile Exchange, up from less than 13% of all such "long" positions at the beginning of 2002. Their bets on falling prices have declined to 21% of all such wagers, compared with 28% of these "short" positions three years ago. . . .

The impact of financial investors probably will grow, because a slew of major investment companies have shifted into energy trading recently. Rubicon Fund Management LLP, a $3 billion London-based hedge fund, recently hired William Callanan, a former Soros Fund trader, to lead its effort. Other major hedge funds, including Citadel Investment Group of Chicago, New York's Vega Asset Management, and Ritchie Capital Management LLC of Geneva, Ill., also are scouring the market for veteran energy and electricity traders.

On Friday, Morgan Stanley announced that it will spend $775 million to buy the rights to 24 million barrels of oil to be produced over the next four years from Anadarko Petroleum Corp. A year ago, the big Wall Street firm bought oil and gas reserves in the Gulf of Mexico for about $300 million from another oil producer, Apache Corp. The deals are part of an effort by Morgan Stanley to expand into outright ownership of energy assets, rather than simply trading for customers and for Morgan Stanley's own account. Such ownership gives the company a more-direct way to play the oil market.

Many European banks also are stepping up their involvement in energy trading. For example, Benoit de Vitry, head of commodities trading at Barclays Capital PLC in London, says he has hired 26 former Enron energy traders, mostly in London. . . .

Hedge funds, CTAs and pension plans control about 15% of the $200 billion or so tradable energy market, according to analysts and traders, including oil futures. They also trade various related positions, such as energy stocks. While they are a relatively small part of the market, some of these investors have an outsize impact because they trade more actively than other participants in the market, like oil companies and airlines, analysts say.
Ah, yes, the magic of the market -- again. Who can stand in the way when there's a dollar to be made? Indeed oil is a real commodity, not Polanyi's fictitious ones. That being said, offering up the lifeblood of industrial civilization to the whims of finance capital which cares not a damn for real production and wealth but only the electronic blips representing pieces of paper representing purchasing power is a recipe for disaster.

Perhaps Iran is right after all? In case you missed it, last weekend Iran's OPEC governor Hossein Kazempour Ardebili said there was a global oversupply of 2.8 mbd in 2004:III. The upshot is, of course, that when the speculative fever abates (whenever that might be), prices could fall sharply. No wonder the US is pressing the Saudis hard to throw caution to the wind and pump up to maximum capacity!

Yet how far is "far"? Once again one finds an analyst to disagree with the claim of World Bank chief economist Francois Bourguignon that the "real" price of oil (NYMEX) is around $30/barrel.
Jeff Curry, head of commodities research at Goldman Sachs, estimates that crude-oil prices would be in the low $40s a barrel were it not for these speculators.
OPEC meets again in September and reports say the group is likely to formally re-calibrate its price band. Might $30 become the new floor? Any wagers for even higher?

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