Experts say traders, not conflict or supply shortfall, drive oil to US$95

The New Paper 7 Nov 07;
Blame them for high oil prices?
Experts say traders, not conflict or supply shortfall, drive oil to US$95

OIL prices soared to a record high of US$95.93 ($139) a barrel last week, and experts say the trend is likely to continue.

But unlike past incidences of oil price spikes, this one doesn't seem to be linked to any crisis, say analysts. There have been no recent threats of conflict that may trigger supply interruptions.The Opec nations are also pumping out ample supplies of crude. And demand has been sluggish in recent months with the weak consumer sentiment in the US.

So what's causing oil prices to hit record after record?

Analysts believe that oil traders may be behind the current run-up in prices, reported The Washington Post.

Traders, who treat oil like any other commodity, are believed to be taking advantage of the weak US dollar and money flowing out of stock markets to drive oil prices upwards.

And experts say the last 10 weeks have shown how much these traders can influence the oil market, driving prices to levels analysts say are up to US$30 more than what a barrel of crude should cost.

Deutsche Bank oil economist Adam Sieminski told the Post that sentiment is one of the factors that has helped traders push oil prices skywards.

He said that when investors hold a large number of options to buy oil at a price of US$100, 'it's almost like magnetism. It draws prices to that level'.

Options allow traders to 'bet' on what oil prices will be in the future. If they hold an option to buy oil at US$100, that's the price they would pay for a barrel if the market prices exceed that amount before the option expires.

Many veteran oil analysts say that traders are creating a bubble in the market and that the sudden price spike could reverse just as suddenly.

However, traders say that they're not betting on higher oil prices on a whim.

They believe that even though though supplies are currently ample, it doesn't mean they will stay that way.

'There is no current shortage, but no one deals on today's market. They make deals based on tomorrow's market,' said Mr Joseph Stanislaw, an oil consultant and senior adviser to the accounting firm Deloitte & Touche.

'And that's what they're worried about.'

Even though Opec nations are pumping out a surplus now, traders say that the extra output may not be able to satisfy the appetites of rapidly-growing economies like India and China a few years down the road.

If supplies in some volatile oil-producing countries like Nigeria and Iran were to be disrupted, experts predict that oil prices can hit US$160.

'It would be silly if we waited until things were not available,' said a veteran energy trader at a US hedge fund.

'People react to perceptions of what will happen. That's not idle speculation.'