Don’t Blame The Speculators Alone
- 1. DON’T BLAME THE SPECULATORS ALONE Presented By RAMYA KRISHNAMURTHY (76) SONICA DALMIA (95)
- 2. WORLD VIEWS ON OIL PRICES American Politicians – “Finger speculators for feverish rise in oil prices” OPEC – “Speculation driving oil prices” Italian Finance Ministry – “Magnum of speculative champagne included in the price of each barrel” Austria – “European Union must impose tax on speculation” Saudi Arabia & Other big Oil Producers – “Prices are to be blamed on frothy markets rather than idle wells” International Energy Agency – “ Supply and Demand and not speculation drive oil prices”
- 3. SUMMARY: KEY TAKEAWAYS As the price of crude oil has continued to hit new record highs, many investors have questioned whether the gains are justified by supply-demand conditions or are the result of investor speculation. The largest driver of crude oil prices in 2008 appears to be the growing recognition of long-term supply constraints, as the production at some of the world’s largest oil fields has matured while new discoveries have been smaller and costlier to develop. Investor interest in oil has played a role in pushing prices up in the relatively small oil futures market, but it is impossible to calculate to what extent these investments represent near-term speculation or a reaction to the long-term supply – demand outlook. The five-year increase in crude oil prices is the fastest ever, has contributed to a fall in U.S. gasoline demand, and presents a growing challenge to the global economy. With increasing recognition that the world’s era of “cheap oil” may have come to an end, a meaningful and sustainable decline in oil prices may only be possible in the near-term if demand growth decelerates in fast-growing developing markets, such as China and Saudi Arabia.
- 4. Discoveries of large, low-cost oil fields have been increasingly rare. The relatively small market capitalization of crude oil futures means investor moves can result in big price swings. U.S. consumer spending on energy reached 20 year highs, though it still has remained below early-1980s peaks. Oil price is only “Speculation”. Follow the oil, not the futures. It takes two to Contango. SUMMARY: INSIDE
- 5. SUPPLY CONSTRAINTS INCREASINGLY EVIDENT
- 6. Growing demand and continuously rising oil prices in recent years have failed to spur a significant increase in crude oil production, leading to growing recognition that future supply growth may be lower than anticipated With few new discoveries of giant, low-cost fields since the 1980s, future supplies are increasingly dependent on maturing older fields and smaller new discoveries Incremental oil output costs more Smaller oil fields are generally more costlier Discoveries have tended to be of lower quality and tend to be located in less-accessible places Production growth has been constrained by government intervention and instability SUPPLY CONSTRAINTS INCREASINGLY EVIDENT
- 7. RELATIVELY SMALL CRUDE OIL MARKET SUSCEPTIBLE TO LARGE PRICE SWINGS
- 8. RELATIVELY SMALL CRUDE OIL MARKET SUSCEPTIBLE TO LARGE PRICE SWINGS The total market capitalization of crude oil futures is relatively small (less than half of the size of Exxon Mobil—the largest U.S. oil company). rising investor interest in oil can contribute quickly to disproportionately large price swings. It is difficult to gauge whether the recent surge of investment in oil is “speculative” or driven by growing recognition of tight supply/demand conditions new investment in crude oil markets is coming from institutional investors, that typically have long investment horizons. In addition, a tighter long-term supply-and demand outlook provides motivation for countries to build inventories
- 10. US CONSUMER SPENDING ON OIL ROSE TO 20-YEAR HIGH Consumer spending on energy—for transportation and home operations—hit a two-decade high in March 2008, both as a percentage of consumer spending and income At 6.4% of disposable personal income, energy takes up a greater share of household earnings than at any point since 1985. Energy accounted for 6.6% of consumer spending—its highest level since 1986. There have been some signs that prices are beginning to curb demand growth in the U.S. In March, miles traveled on U.S. roads fell 4.3% on a year-over-year basis, the first decline since 1979 and the steepest fall on record. However, developing countries—including China and Saudi Arabia—continued to account for the bulk of global demand growth
- 11. OIL PRICES ARE ‘ALL’ SPECULATION Government has strong views on commodity market speculation; introduced ‘Commodity Speculation Reform Act, 2008’ Supply and Demand cannot lead to sudden rises; there are more contracts than barrels From 1998 to 2008 the share of ‘long interests’ - market positions that benefit when prices rise – in commodities held by financial speculators has gone up from 1/4 th to 2/3 rd of the commodity market From 2003 to 2008, investments in index funds tied to commodities has grown twenty-fold from $13 billion to $260 billion
- 12. FOLLOW THE OIL, NOT THE FUTURES Barclays Capital calculates that “index funds” account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption Neither speculators nor index funds buy physical oil; instead ‘place bets’ No oil is held back from the markets making these bets like bets on a football match If speculators managed to push prices to unjustified heights, demand would contract leaving unsold pools of oil “ All producers bar Saudi Arabia are pumping oil as fast as they can” Price rise through speculation will either cause demand to fall or stockpiles to rise; neither has happened
- 13. IT TAKES TWO TO CONTANGO Speculators help airlines and other big consumers to hedge against rising prices, and so to reduce risk – a massive boon amid the economic turmoil Provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply
- 14. Reference The Economist (July 5 th 2008). The Analyst (June 2008). Wikipedia. Forex News. International Energy Agency Report. Staff Report, Senate Permanent Subcommittee on investigation committee on homeland security and government affairs. CNN Money.com
- 15. THANK YOU