“Crude oil is (now) more than just a physical product“, according to NPRA Chairman William Klesse. As he noted, “Today there is ample crude in the world, and crude is not at $80/bbl because of physical markets“.
This was a strong statement from the head of the US National Petrochemical & Refiners Association, at the start of the annual meeting in San Antonio. As he added, the reason behind the price hike is that crude has become “a financial product“.
The chart, from the Financial Times, shows the reason for his concern. Last year, European pension funds alone “invested” €21bn ($29bn) into commodity funds, particularly oil. This was a 145% increase on the 2008 figure, with minimum 60% growth expected this year. This flood of money hiked oil prices 78%, even though demand growth was poor.
Now, however, as the FT notes, there is growing “alarm” amongst the investment community about the relatively poor results they obtained. The “investors” who held the fund for a year made just 17% by December, not 78%. The reason was that they “invested” in futures markets, which were in contango (where the months ahead are priced higher than today’s spot price).
Thus although oil prices rose, each month the “investors” lost most of the gain, as the future contract came closer to actual delivery. Instead, the bulk of the gain went to those who launched the commodity funds, or those who actively traded the futures markets.
These highly-paid “investors” failed to understand the simple truth that commodities trading is a zero-sum game – you win, I lose. Or as Goldman Sachs’ CEO Lloyd Blankfein told the US Congress earlier this year ‘when Goldman sells a security that subsequently goes up (i.e., on which the other party makes money), “we wish we hadn’t sold it“.’
Meantime, as Klesse noted, it is the petchem and refining industries that has to cope with the end result – an oil price that is currently very over-valued in relation to the laws of supply and demand.