Prometheus 6

"The market is no longer about physical supply and demand for oil," says Ben Dell, energy analyst at Sanford Bernstein in New York. "The Saudis could be pumping another million barrels and it wouldn't change a thing."...

Many investors seem to be using oil as a hedge against a weak dollar. Others are simply riding a profitable trend.

Periscope: How Hot Money Is Pushing Oil To $100 a Barrel And Beyond
NEWSWEEK
Updated: 2:11 PM ET Nov 17, 2007

As oil prices swung wildly last week—first surging breathtakingly close to the $100 mark, then dropping off again—there was some frantic finger-pointing over just who (or what) was to blame for the latest spike in prices. Resisting calls for OPEC to pump more oil to cool off markets, Saudi Oil Minister Ali al-Naimi insisted that supplies and inventories are meeting demand and don't justify the current sense of crisis. To bolster his argument, al-Naimi carted Western attendees of last week's OPEC summit in Riyadh into the desert to show off a $500 million mega-expansion project that will raise the country's production by 250,000 barrels a day. The $25 jump since September, al-Naimi said, was the fault of "speculators" beyond the cartel's control.

Self-serving? Perhaps. But al-Naimi's view has lately been echoed by oil-company executives and Wall Street analysts. Indeed, hedge funds, investment banks, program traders and ordinary investors have been piling billions into oil futures, gas options and complicated energy derivatives.) One analyst says the energy-assets market—opaque, and virtually non-existent a half decade ago—could be as big as $20 trillion. Energy hedge funds now number 600 (up from 180 in 2004). Investment banks like Morgan Stanley have made up to a quarter of their recent profits from energy trades, says hedge-fund tracker Peter Fusaro. While the oil analysts polled by NEWSWEEK last week differ on the extent of the impact, they all agreed that the money players have helped drive up the price. "The market is no longer about physical supply and demand for oil," says Ben Dell, energy analyst at Sanford Bernstein in New York. "The Saudis could be pumping another million barrels and it wouldn't change a thing." In a report he wrote last week, he estimates the oil-price spike could hit $140 before coming down, in large part thanks to speculators.

With most analysts expecting oil to eventually settle at $60 or $70, what's keeping all the money pouring into the market? Many investors seem to be using oil as a hedge against a weak dollar. Others are simply riding a profitable trend. "We've had five or six years of rising prices, and it hasn't affected supply and demand," says Paul Horsnell, head of energy research at Barclays. "So the market has been happy to keep testing higher prices." Once that signal comes (e.g., drivers buy less gas or switch to fuel-efficient cars), "the drop will be sharp and abrupt," says Dell. Until then, the herd instinct will likely prevail.
—Stefan Theil and Zvika Krieger