Wednesday, 28 January 2009

OPEC: Stop speculating on oil

The oil futures market participants can be roughly divided into two groups: 1) those who use oil commercially and need to have an insurance against too big price changes (i.e. hedging), and 2) those who want to make money purely by guessing where oil prices are going to go next (i.e. speculating).

Both serve a purpose, but the ordinary Joe only cares about the credit card charge at the pump and the price of an airplane ticket.

Now OPEC, that once mighty cartel of oil producers, is saying that the world (read: US) should curb oil speculators.

According to OPEC, speculators are not only responsible for the fast price hike last year ($147/brl), but also the abysmally low prices last year ($32/brl). OPEC is now saying through it's secretary general Abdalla el-Badri, that this cannot go on. Speculator must be stopped.

You can easily guess the market's reaction to this plea.

Everything from almost violent denial to manic laughter by all of the banks, brokers and traders - all of whom reaped gazillions of profit/losses last year by playing the market. They claim speculation is sacrosanct.

And fundamentally they are right. There's nothing wrong with it - in fact, the efficient market hypothesis calls for speculators, in case you still happen to believe in such a fairytale hypothesis after the fall of 2008.

So, OPEC might be onto something here.

Consider the situation in not too near future: the reserve buffer between maximum production flow and demand has diminished to almost nothing due to world oil production nearing peaking. There are still some reserves on the ground, but require huge investments. Speculators can influence the market either way, and help amplify supply-demand based huge price drops or spikes - at least for a while.

Nobody wants to invest in that scenario. So, the flow of oil diminishes. And the world faces a starvation of energy, and if continued, a true starvation of food.

Now, this scenario would be merely amusing if it only were hypothetical.

Because, depending on whom you ask from, that's exactly what's happened last year. Oil price spiked, then crashed, now all investments are postponed and the likelihood of steady oil-flow to support economies (once we get out of this current financial mess) is drastically reduced.

Now, whole opuses will be written about the previous oil bull market and who was the culprit for the rise and the fall. The average joe? The energy hungry Asians? Evil speculators?

Nobody knows for sure and nobody will ever find out.

What is clear is that the speculators did not help in balancing the spike in either direction.

That is what this is all about: should speculators allowed to play the market of the world's most important single commodity for the potential detriment of the most of the world?

Who wins if this is allowed to continue?

Surely not you or me.

Unless you are speculating on the oil market, which is btw - looking more and more enticing as each day goes by.

So, because the world is unlikely to curb any speculation - hop on and play the game. At least you'll have somebody to curse at, next time you're at the pump and the price has shot through the roof.