Speculators to blame for $100 oil spike

On Wednesday crude oil futures hit $100 for the first time. Most analysts and news reports recited the well-known trifecta as the root causes – increased global appetite for oil coupled with dwindling inventories, political instability in the Middle East and Nigeria, and a weak dollar. But other market watchers are not so sure the recent rise has anything to do with these causes that have affected the markets for the past six months.

Dr John Sfakianakis, chief economist at Saudi British Bank, the kingdom’s HSBC affiliate, said speculation by oil futures traders is the main reason why oil hiked this week. “Oil prices were hovering around $100 for some time now – the factors that people explained for the uptrend are still there and haven’t changed over the past few months.”

He said the price jumped more than $100 due to one trade. “This tells me that the market is not yet convinced that oil prices will necessarily go up. It will need more than a signal to push the price up.”

The origin of the forces that joined to drive oil to a near record high – the Paris-based International Energy Agency says the actual record price in inflation adjusted dollars was $101.70 in 1980 – is a moot point now. The psychological threshold of $100 has been passed and can now serve as a price floor.

With a weak dollar and low interest rates in the US, speculative money has an interest in commodities and in oil, and that creates momentum for oil prices to continue its upward trend. “Since we have hit the psychological level, at some point, it is not unthinkable that oil prices will continue to rise,” Sfakianakis added.

Monica Malik, an economist with EFG Hermes, said higher oil prices are definitely positive for the region. “Government revenues and surpluses are set to increase in 2008, and increased production also means that real GDP growth will be higher.” She added the non-oil sector will benefit due to increased investment, and “government policies will continue to be expansionary”.

As for the negative consequences, the most apparent will be the hit consumers feel this winter. This hike in prices have given rise to criticism of oil traders and speculation in the markets.

Shane Sweet of the New England Fuel Institute, a coalition of heating oil suppliers in the US, said his organisation has appeared before Congress a few times last year, and new legislation is under way in both the House and the Senate.

“I think the fundamental problem that we see, is that fuel is a way for people to trade and make money, as opposed to our people who are trying to put it into American homes and businesses. We believe excessive speculation and in some cases manipulation is driving up the price of fuel.”

Opec officials have levelled similar charges against speculators and said current prices are not justified by the laws of supply and demand.

One of the big players in the commodities markets – Goldman Sachs – has been mentioned as being responsible for the chaotic moves in oil prices. According to one analyst, the firm controls three-quarters of the global commodities futures market. Goldman recently predicted oil will reach $115 in 2008.