Crude nears $126 as speculator debate continues

West Texas Intermediate (WTI) closed up $2.27, or 1.8%, to a record closing price of $125.96. WTI futures are nearly 100% higher than they were a year ago.

Brent crude oil for June settlement climbed $2.56, or 2.1% to a record $125.40 /bbl on London's ICE Futures Europe exchange. In intra day trading the contract scraped an all time high of $125.90.

A number of issues across the complex are being cited as factors contributing to crude’s record run, such as consistently high demand from China and India, crude's value as an inflation hedge against the falling dollar, OPEC supply restraints, supply threats in Iran, Iraq and Nigeria, refinery bottlenecks in the US and the role of speculators in markets.

The latter point was taken up by earlier this week by Senate Majority Leader Harry Reid and Senators Jeff Bingaman, Max Baucus, Charles Schumer, Byron Dorgan, Maria Cantwell and Bernie Sanders when they unveiled the Consumer-First Energy Act of 2008, a bill that claims to address the root causes of high gasoline prices.

One of the bill’s requirements is for the Commodities Futures Trading Commission (CFTC) to set a substantial increase in the margin requirement for all oil futures trades, contracts or transactions.

Today exchange and over-the-counter (OTC) market operator IntercontinentalExchange issued a statement in response.

“The hastily submitted legislative proposals to place arbitrary controls on regulated energy futures markets do not offer short-term relief or long-term solutions to the drivers of crude oil prices,” said the statement. “The well-documented rise in worldwide demand for crude oil cannot be impacted by government imposed market controls.”

The exchange added that any such proposal would compromise the ability of markets to provide important price signals that reflect the collective real-time views of thousands of market participants, and provide information to producers who rely on the operation of these markets to make long-term investment decisions.

“Proposals designed to place restrictions on qualified participants would inevitably impact liquidity, leading to the degradation of price discovery, and importantly, increasing the potential for even greater price volatility. The presence of hedgers, and those that are willing to take on the risk that hedgers wish to lay off, are vital to properly functioning markets,” it said.

Deutsche Bank’s chief economist Adam Sieminski noted that speculative buying of crude oil has not increased in line with the oil price. According to the CFTC’s weekly Commitment of Traders report, Sieminski noted that noncommercial net length in crude oil stood at 53.3K contracts at the end of April compared with an average net long exposure of 51.4K over the past 18 months.

“We believe this relatively timid investor positioning in crude oil reflects the unwillingness of the speculative community to adopt strong directional trading strategies as the oil price hits new successive all time nominal highs,” he wrote.

Earlier in the week Barclays Capital raised its price forecast for the second half of the year to an average of $126/bbl while Goldman Sachs revised its oil price spike scenario to forecast that supply shortfalls will probably send oil to between $150 and $200 a barrel within two years.

"We believe the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent and resulting in needed demand rationing in the OECD areas in particular the United States," the report noted.

It was reported Friday that the number of contracts for Nymex December 2008 call options at $200/bbl have risen by 30% since the end of April. Such positions stand to profit if the oil price is greater than $200 by the end of this year.

Such a scenario is ``possible if we have a continuing devaluation of the dollar with respect to other currencies,'' OPEC President Chakib Khelil said yesterday at a press conference in Washington.