Oil Investors Pulled $39 Billion in Futures Contracts

By Daniel Whitten

Sept. 10 (Bloomberg) -- Commodity index investors, blamed for record oil prices, sold $39 billion worth of oil futures between a July record and Sept. 2, causing crude to plunge, according to a report released today.

The work by Michael Masters, president of the Masters Capital Management hedge fund, blames investors who buy and hold an index of commodities for driving prices to records and for their subsequent drop. It comes a day before the U.S. Commodity Futures Trading Commission is set to discuss its own study of energy trading with a congressional committee.

Masters testified three times before Congress this year, arguing that limits on traders would cut oil prices to $65 to $70 a barrel. He has been cited by lawmakers who introduced at least 20 measures to curb speculation. Congressional pressure on the CFTC to step up enforcement and restrict anonymous trades has pushed index traders out of their positions, Masters said.

``I don't think it's just coincidence that the money came out after the pressure was put on these folks,'' Masters, who wants legislation that would set limits on index commodity holdings, said in an interview.

Crude oil futures surged to a record $147.27 on July 11, an increase of 53 percent for the year, on the New York Mercantile Exchange, then fell 26 percent to $109.71 on Sept. 2. Oil fell $1.24, or 1.2 percent, to $102.02 today on the Nymex.

``The speculators that drove prices up basically deflated the bubble,'' said Fadel Gheit, director of oil and gas research at Oppenheimer & Co. in New York. ``They said, `That's it, the game is over. We are going to bet on another horse.'''

`Buying Pressure'

Crude oil prices increased almost $33 a barrel from January through May due to ``buying pressure,'' then decreased by about $29 a barrel starting July 15 because of ``selling pressure,'' according to Masters's report.

Senator Byron Dorgan, a member of the Committee on Energy and Natural Resources, said today that there was ``no apparent reason'' for such fluctuations.

The study ``finally destroys the myth that there is some supply and demand relationship to what has happened to the run- up in oil prices,'' Dorgan, a North Dakota Democrat, told reporters today in Washington. ``This is pure, unbridled, relentless speculation.''

The CFTC is expected to release a report tomorrow that will lay out its findings on the impact of index investors and over- the-counter trading on commodities. Regulators may require Wall Street banks to regularly disclose their energy futures positions connected to the unregulated swaps market, according to people familiar with the discussions.

Investment Banks

JPMorgan Chase and Co., Goldman Sachs Group Inc., Barclays Plc and Morgan Stanley control 70 percent of the commodities swaps positions, and swaps dealers are the largest holders of Nymex crude oil futures contracts, Masters said.

Representatives for all four banks declined to comment. Banks enter into swaps with airlines and hedge funds to profit from moves in crude prices and then offset some of that risk in futures markets such as the Nymex.

``These large financial players have become the primary source of the recent dramatic and damaging price volatility,'' Masters said in the report.

The commission has put out special requests for information from traders and imposed limits on the number of U.S. oil futures contracts a trader can hold on Intercontinental Exchange Inc.'s London-based ICE Futures Europe market.

Masters's Critics

Critics of Masters's earlier work said he lacks access to the data needed to draw his conclusions. His hedge fund is based in the U.S. Virgin Islands.

Walter Lukken, the acting chairman of the commission, is among those who question the validity of Masters's data.

``Just as weather forecasters have no effect on the weather, energy speculators have no effect on the price of oil,'' said Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents investors. ``His fallacy is that he ignores the laws of supply and demand, which determine the price of oil.''

Masters earlier this year reported that index speculators such as those that trade on Standard & Poor's GSCI accounted for $260 billion of assets, up from $13 billion in 2003. As of Sept. 2 that number was down to $223 billion, Masters said.

``For the supply and demand people, what I would like for them to explain is how from the supply-and-demand rationale you could have oil at $95 in January, at $150 in June and back to $100 in September,'' Masters said.

Hedge Fund Holdings

Masters's hedge fund held shares in the four major U.S. airlines, AMR Corp., Delta Air Lines Inc., US Airways Group Inc. and UAL Corp, according to a June 30 regulatory filing. Airlines hedge oil and have been hurt by commodity price fluctuations.

He said he extrapolates his numbers from agricultural data, which is publicly available, to arrive at overall numbers that include oil futures investments.

In arguing for legislation, lawmakers, primarily Democrats, will point to the Masters report and a Massachusetts Institute of Technology report released in June alleging that speculation caused the rise in energy prices.

``Why did so much money come into these markets and why is it leaving?'' asked Senator Maria Cantwell, a Washington Democrat, in an interview. If Congress reduces scrutiny, ``do we see the run-ups happening again?''

Scott Defife, with the Smart Energy Policy Coalition, said Masters's findings ``run counter to the analysis and judgment of the vast majority of economists'' as well as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

Those and others have ``concluded that volatile energy prices are the result of global economic conditions, the changing strength of the dollar and supply-demand fundamentals,'' Defife said in a statement.