Speculation by large investors — and not supply and demand for oil — were a primary reason for the surge in oil prices during the first half of the year and the more recent price declines, an independent study concluded Wednesday.
The report by Masters Capital Management said investors poured $60 billion into oil futures markets during the first five months of the year as oil prices soared from $95 a barrel in January to $145 a barrel by July.
Since then, these investors have withdrawn $39 billion from those markets as prices have retreated dramatically, the report said. Oil traded at about $102 a barrel Wednesday on the New York Mercantile Exchange.
“We have clear evidence the fund flow pushed prices up and the fund flow pushed prices down,” said Michael Masters of Masters Capital Management, calling the amount of money moving into oil futures markets by large institutional investors in the early part of the year “way off the scale.”
Masters said its analysis shows investors “began a massive stampede for the exits” on July 15 and that this caused the price decline.
“These large financial players have become the primary source of the dramatic and damaging volatility seen in oil prices,” concluded the report.
The report was released Wednesday by House and Senate sponsors of bills to put additional curbs on oil market speculation and comes in advance of a report on oil market speculation expected possibly this week by the Commodities Futures Trading Commission. The commission regulates commodity markets.
Sen. Maria Cantwell, D-Wash., a sponsor of an anti-speculation bill, said the Masters report challenges CFTC claims to date that supply and demand forces — and not excessive speculation — has driven up oil prices.
“This analysis illustrates that when oil speculators poured large amounts of speculative money into oil markets, prices skyrocketed just as they were hoping ... And when the speculative money got pulled out, prices tumbled,” she said.
Sen. Byron Dorgan, D-N.D., said he wants to know “how oil speculators were able to drive prices up and down while the CFTC was asleep at the switch.”
An interagency task force, led by the CFTC, concluded in an interim report last July that “fundamental supply and demand factors” influence the oil markets and that the data “does not support the proposition that speculative activity has systematically driven changes in oil prices.”
Senate critics of the regulatory agency charged that report was based in flawed evidence.
“The CFTC has its head in the sand,” said Rep. Bart Stupak, D-Mich., chairman of the House Energy and Commerce investigations subcommittee.
Stupak said the Masters report shows that that oil prices soared when speculators poured money into future markets even as the federal Energy Information Administration was forecasting supply would exceed demand.
Congress for months has been considering various measures aimed at curbing oil market speculation, but those efforts have been thwarted amid disputes over other energy issues from taxing oil companies to new offshore drilling.
Legislation before the Senate would put limits on the amount of oil certain traders, interested only in speculation, would be allowed to purchase in futures markets and give new authorities and staff to the CFTC to regulate oil markets.