Hedge funds cut bets on oil price

Hedge-fund managers and speculators reduced bets on higher oil prices by 80 percent since July as crude futures rose to records and US regulators started investigating trading, government data show.

So-called speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27 from a record 127,491 on July 31, according to a US Commodity Futures Trading Commission (CFTC) report on May 30.

The decline may complicate the CFTC's probe as regulators try to determine how much of the rise in oil to more than $135 a barrel last month was caused by speculators who may have manipulated the market instead of consumer demand. The CFTC, under pressure from Congress, said May 29 it was investigating the doubling of oil prices the past year and said it will consider giving more detail on the types of oil investors and their holdings.

"The real problem is with passive investors like pension funds and index traders, who do not really qualify as speculators because they're long term" holders of oil contracts, said Olivier Jakob, managing director of Petromatrix Gmbh, a consulting company in Zug, Switzerland. "There are no numbers on index traders, that's why the CFTC is going to ask for them and publish them."

Unusual fluctuations in cotton prices that disrupted sales by farmers in March are also the target of an investigation by the CFTC, two people familiar with the probe said May 31. Cotton traded on IntercontinentalExchange Inc's ICE Futures US unit rose to a 12-year high of 92.86 cents a pound on March 5, then fell 26 percent by March 20.

Speculative positions

Results of the probe may be released as soon as today, said the people, who asked not to be identified because it hasn't been made public.

Scrutiny of the oil market increased as Congress held hearings May 22 and oil soared to a record $135.09 a barrel the same day, threatening the US economy and spurring inflation. OPEC President Chakib Khelil on May 31 blamed record prices on speculation and the declining US dollar, saying there's no shortage of crude.

Prices fell the most since March last week. Crude oil for July delivery declined 3.7 percent to $127.35 a barrel on the New York Mercantile Exchange.

Some investors said the decline shows the market isn't being manipulated. Total speculative long positions in New York futures fell to 215,999 contracts in the week ended May 27, down 18 percent from a record 264,395 on July 31, according to CFTC data.

"There is good reason why prices are high, and it's driven by fundamentals," said Paul Tossetti, director of oil market analysis at consultants PFC Energy in Dallas. "When you look at the number of players, the number of open positions, I don't know how anybody can manipulate anything."

Global oil demand, forecast to increase 1.2 percent this year, may outpace supply growth as energy consumption increases, especially in China and India, the Paris-based International Energy Agency said in a May 13 report.

The CFTC has been investigating the transportation, storage and trading of crude oil in the US since December. The probe includes oil futures contracts.

Acting Chairman Walter Lukken said the CFTC will leave "no stone unturned" to make sure the oil market isn't being manipulated.

Speculators playing

Speculators "are playing the commodities without question, and they are taking bets on where it's going to go, but they are betting on the fundamentals", said Joseph Stanislaw, chief executive officer at JAStanislaw Group LLC, a consulting company. "Demand is growing at a faster rate than production capacity."

The CFTC's Commitment of Traders report, issued each Friday, shows how many futures contracts have been bought, referred to as "long" positions, or sold, known as "short" positions, by three types of market users.

Commercial traders, including oil producers and refiners, use the market to hedge their business, while non-commercial traders include financial speculators and hedge funds. The third category is for non-reportable traders, whose positions are too small to consider.

Futures are increasingly being bought and sold by investors that track commodity index futures such as the Reuters/Jefferies CRB Index.

The CFTC provides some weekly information on index trader positions for 12 agricultural commodities, including corn, cotton and soybeans. It doesn't provide the data on oil.

Agencies

(China Daily 06/03/2008 page16)