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May 20, 2006

Risk and reward

From the (paid-subscription) Wall Street Journal:

Geopolitical tensions have added roughly 20%, or about $15 a barrel, to the price of crude oil, OPEC acting secretary general Mohammed Barkindo told an OPEC-International Energy Agency workshop in Oslo. Mr. Barkindo pointed out that there was “absolutely no supply shortage” of oil and that global inventories were at five-year highs. That means there must be some other explanation for oil prices staying stubbornly near $70 a barrel, Mr. Barkindo said. Some analysts suggest that speculation has helped, but clearly the sticky issues surrounding Iran, Iraq, Venezuela, Nigeria and other oil-producing nations have played a big part. Mr. Barkindo warned it is also getting harder to predict demand, making exploration projects riskier.

If you’ve read this blog before, the speculation point won’t come as much of a surprise. But to reiterate:

On Nymex, oil contracts held mostly by hedge funds — essentially private investment vehicles for the wealthy and institutions, run by traders who share the risks and rewards with their partners — rose above one billion barrels [in April], twice the amount held five years ago.
… “The hedge funds have come roaring into the commodities market, and they are willing to take risks,” said Brad Hintz, an analyst with Sanford C. Bernstein & Company, an investment firm in New York.
… While all this new money has contributed to higher prices, by some estimates perhaps as much as 10 percent to 20 percent, the frantic trading ensures that even the biggest players — including the major oil companies — cannot significantly distort the market or tilt it artificially in their favor. It also makes oil markets more liquid, meaning a buyer can always find a seller.
… “Everybody is jumping into commodities, and there is a log of cash chasing oil,” said Philip K. Verleger Jr., a consultant and a former senior adviser on energy policy at the Treasury Department.
“The question is when does the thing stop. Eventually they will get burned.”

In the meantime, consumers are getting burned by a combined risk/speculation premium that is probably adding close to $30 for every barrel of oil sold. Which puts the “real” (yes, I know it’s not really real) oil price at around $40.

Posted by Stephen at 12:20 AM in Energy + environment | Permalink | TrackBack (0)

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