Oil's Wild Ride
Tuesday, September 23, 2008
The price of the benchmark crude oil catapulted to $120.92 a barrel on the New York Mercantile Exchange yesterday, a $16.37 increase and the biggest one-day dollar rise ever, driven largely by a scramble by one or more financial firms to make purchases before the expiration of oil contracts for October delivery. At one point, the price was up $25.55.
The price of oil for delivery in other months also surged because of a weak dollar; hints that Saudi Arabia might trim the sales it allocates to U.S. firms; and the slow restart of oil wells in the Gulf of Mexico, where three-quarters of petroleum production remains shut down because of Hurricane Ike.
Many investors are also fleeing stock and equity markets, turning to gold and oil in search of protection against financial instability and inflation. The price of oil for November delivery rose $6.62 a barrel, to $109.37.
Watching the price of oil has been enough to give anyone -- consumers, traders, policymakers -- economic whiplash. From a July 11 peak of $147, prices slid by nearly 40 percent over two months before bouncing much of the way back in the past week.
The leap in the October crude oil contract -- which ranged from $103 to $130 yesterday alone -- ignited new calls for tougher government oversight of commodities markets, in which financial firms and investors have played a bigger and bigger role.
"Do speculators cause the price of oil to go up? No. Do they cause the price to go down? No. Do they cause it to go up and down? The answer is yes," said Michael Mussa, a senior fellow at the Peterson Institute for International Economics and a former chief economist at the International Monetary Fund. "Speculation is a great part of the determination of price."
Michael Masters, who manages a hedge fund and has testified in Congress in favor of tougher market supervision, said the rise in commodities prices was the result of the Bush administration's prohibition of some types of short selling, trades that count on a decline in a stock's price.
"That's what happens when you regulate on the one hand but not on the other hand," he said. "Money flowed out of the equity markets to the commodities markets." Masters added: "What boggles my mind is that on the one hand the administration can prevent short selling, but on the other hand can't give us decent commodities regulation. . . . It's just hypocritical."
The Commodity Futures Trading Commission, which has played down the role of speculators in oil markets, issued a statement saying it would seek "to ensure that no one is taking advantage of the current stresses facing our financial marketplace for their own manipulative gain."
Traders from two major oil refiners said that the refining industry was not behind the rush to buy supplies for October. They suggested that one or more financial players had earlier sold short -- promising to deliver barrels they didn't own -- and now needed to buy oil to cancel out those bets and avoid the penalties on companies that don't fulfill commitments for physical delivery.
"It's a squeeze," said Roger Diwan, an oil analyst at PFC Energy, a consulting firm. "It looks like a couple of people got caught short looking for crude, and there was no one to sell them today."
The spike in prices tripped the $10 trading limit on the New York Mercantile Exchange, triggering a five-minute halt in trading at 1:31 pm. Prices then rose further before dropping back.
Analysts said the jump was not limited to the volatile October contract.
Diwan said that Saudi Arabia has indicated that it will trim output, though he said the amount wasn't clear and could be as little as 60,000 barrels a day. Earlier this month, the Organization of the Petroleum Exporting Countries met and urged Saudi Arabia to comply with its production quota, which would require a cut of more than half a million barrels a day.
In addition, the big federal rescue package for financial firms has caused oil traders to reassess forecasts of U.S. economic growth. If the Treasury and Federal Reserve plan works, the economy -- and the oil demand that goes with it -- could be stronger than expected before the package was unveiled.