16 September 2008

USD$39 Billion, The Pullout That Caused The Fall?

CNNMoney.com (also, incidentally, Associated Press and USA Today) reported that a report by Masters Capital Management concluded that speculation could have been the driving factor behind the price increase of petrol. In their report, Masters Capital Management reported:

  • Investors poured USD$60 billion into oil futures from January to May 2008;
  • The price of crude oil increased from USD$95 per barrel in January, to USD$145 per barrel in July;
  • Investors have withdrawn USD$39 billion from oil markets between July 2008 to the present day;
  • These investors became alarmed when US Senate began holding hearings on speculation, starting May 2008;
  • The recent rise of petrol price may have been caused by speculators, not market forces.

The head of Masters Capital Management, Michael Masters, had previously on 20th May 2008, discussed the increasing investment by several new groups. S Dali, in the Star Online, wrote:

Masters talked about the resurgence of several groups over the past five years who he deemed as newcomers to the “commodity speculation scene”. They are corporate and government pension funds, sovereign wealth funds, university endowment funds and other institutional investors. Collectively, they constitute the largest share of outstanding commodities futures contracts than any other group.

Masters refers to them as “index speculators” because they distribute their allocation of dollars across 25 key commodities futures according to popular indices, namely the S&P Goldman Sachs Commodity Index and Dow Jones AIG Commodity Index.

The rising interest in commodities was largely based on the assumption that historically, commodities have no correlation to fixed income and equities. It has to be noted however that while previously the futures market may have been relatively “not big enough” to provide this kind of diversification, this has not been the case over the last 10 years.

As at end 2003, assets allocated to commodity index trading stood at a whopping US$13bil. As of March 2008, that figure has ballooned to US$260bil!

Obviously, something highly significant has happened here with equally significant consequences.

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