One of the biggest recent winners in the oil futures market complained yesterday that speculation has driven up crude oil prices far beyond what they would be based simply on supply and demand.
"With the advent of Nymex oil trading, the law of supply and demand is meaningless," Leon Hess, the chairman of Amerada Hess Corp., told a Senate Governmental Affairs Committee hearing yesterday. Nymex is the New York Mercantile Exchange, where contracts for future delivery of oil are traded, often by people who never actually buy the oil.
"This paper trading is driving the worldwide price... . We had no trouble before we had the Merc."
Despite such protestations, however, sources say Hess and his company are among the most active players on the oil futures market. Amerada Hess recently revealed that it turned a $213.8 million profit in the third quarter on oil futures trading -- the bulk of its earnings in the period.
That didn't stop Hess from complaining about the market. "I'm an old man, but I'd bet my life that if the Merc were not in operation there'd be ample oil all around the world at reasonable price," Hess, 76, said. "I'd bet my life."
Officials of the Commodities Futures Trading Commission, however, said at the hearing that there has been no evidence that unwarranted speculation or market manipulation has been responsible for the run-up in crude oil prices over the past three months.
"We don't think this market has been subject to manipulation, nor has it been subject to excessively large amounts of speculation," John Mielke, director of the CFTC's office of market surveillance, said at the hearing.
And CFTC Commissioner William Albrecht said: "The commission has found no evidence -- no evidence -- that the price rise in the oil futures market is the result of excessive speculation." Rather, he said, the price rise appears to reflect legitimate supply and demand considerations -- although most experts say there is virtually no oil supply shortage -- complicated by concerns over the Persian Gulf.
The testimony came on the second day of hearings called by Sen. Joseph I. Lieberman (D-Conn.) to investigate the role of the futures market in oil prices. Other witnesses included economists, Nymex officials and consumer activists. But Hess was clearly the star.
In his rambling, often humorous testimony -- which Lieberman said he found "entrancing" -- Hess complained repeatedly that trading on the New York Mercantile Exchange had led to a severe distortion in oil prices during the current crisis, which has seen prices rise from $20 a barrel just before Iraq's invasion of Kuwait Aug. 2 to a high of $41.15.
Yesterday, a benchmark barrel of high-quality crude oil for December delivery closed on the New York Merc at $35.17, down 6 cents.
"I'm not against the Merc -- it's here to stay," Hess said. But he added, "If I had my choice as an individual, I wish it wouldn't exist." However, oil industry and futures market sources say Amerada Hess is one of the most aggressive traders in the market.
Sources say Hess set up a sophisticated futures trading operation several months ago, raiding other firms for top trading talent. "They were setting up an organization specifically to speculate on the Merc," said one source familiar with the recruiting effort.
Amerada Hess has given out virtually no information about its trading department, and a spokesman has declined to return telephone calls seeking details. But the $213.8 million profit reported in the third quarter offered some indication as to the magnitude and success of the operation.
And while Hess told Lieberman, "I'm not an expert, I'm learning," he said after the hearing that he personally trades futures for his own account and closely supervises his company's trading department, which he said has 15 traders.
"Our trading in the futures market is not speculative," Hess told the hearing. He said the company trades in the market to lock in oil supplies and prices for its refining operations, and to make profits that offset refining losses.