Back in late June, we [GreenLightAdvisor.com] interviewed Stephen Briese, a seasoned commodities trader, who, based on CoT (Commitments of Traders) reports, published regularly by the CFTC, posited that there was an estimated 200-days of paper oil held by investors/speculators, among them some of the large endowments and pension funds, as well as sovereign wealth funds re-investing their oil profits back into none other than the paper stuff. Briese is the author of The Commitments of Traders Bible.
Is Wall Street to blame for 2008's oil bubble? Steve Kroft, from CBS' 60 Minutes investigates:
Click play to watch the CBS 60 Minutes story aired on January 8, 2009. This is a must see story.
Dan Gilligan of the Petroleum Marketers Association says it is naked futures investors via indexes that are more interested in investing in paper oil for profit.
As the president of the Petroleum Marketers Association, [Dan Gilligan] represents more than 8,000 retail and wholesale suppliers, everyone from home heating oil companies to gas station owners.
When 60 Minutes talked to him last summer, his members were getting blamed for gouging the public, even though their costs had also gone through the roof. He told Kroft the problem was in the commodities markets, which had been invaded by a new breed of investor.
"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.
Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."
"They're trying to make money on the market for oil?" Kroft asked.
"Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down."
Hedge fund manager, Michael Masters says that for every barrel of oil actually consumed in the US, there were 27 barrels traded every day, and interest in commodities indexes grew from $13-billion to $300-billion in 5 years.
About the same time, hedge fund manager Michael Masters reached the same conclusion. Masters' expertise is in tracking the flow of investments into and out of financial markets and he noticed huge amounts of money leaving stocks for commodities and oil futures, most of it going into index funds, betting the price of oil was going to go up.
Asked who was buying this "paper oil," Masters told Kroft, "The California pension fund. Harvard Endowment. Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money - sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."
In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.
There were no disruptions to supply, and India and China did not suddenly increase their consumption overnight. In fact, supply was rising and demand falling.
Michael Greenberger, a former director of trading for the U.S. Commodity Futures Trading Commission, the federal agency that oversees oil futures, says there were no supply disruptions that could have justified such a big increase.
"Did China and India suddenly have gigantic needs for new oil products in a single day? No. Everybody agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from somewhere in the 60s to $147 in less than a year. And we were being told, on that run-up, 'It's supply-demand, supply-demand, supply-demand,'" Greenberger said.
A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters says the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.
"From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down," Masters told Kroft.
Investment banks fuelled the energy market.
Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.
"The investment banks facilitated it," Masters said. "You know, they found folks to write papers espousing the benefits of investing in commodities. And then they promoted commodities as a, quote/unquote, 'asset class.' Like, you could invest in commodities just like you could in stocks or bonds or anything else, like they were suitable for long-term investment."
Its an important informative piece of journalism. Make sure you watch it, in case you missed it.
