Hedge fund investors to blame for soaring price of oil

by Aaron Low

Speculators looking for a quick buck are the main culprits for current sky-high oil prices, adding between $ 8 and $ 10 a barrel, a leading oil industry analyst told a Singapore audience.
This novel theory came from Dr Fereidun Fesharaki, whose credentials include having advised Iran's prime minister on energy issues in the late 1970s before the Islamic revolution. He said there was some truth in claims that China's rising oil demand and fears over terrorism had helped drive oil prices up. But it was aggressively managed investment portfolios known as hedge funds that were the real driver of high oil prices, he added.

“Hedge funds easily add $ 8 to $ 10 a barrel. That can disappear if speculators decide to unload, but until then, we will continue to see high oil prices in the next few months.”
“Among other investing techniques, hedge funds try to make money for investors by effectively betting on the future price of commodities such as oil. As a result, prices will not fall significantly even if the Organisation of Petroleum Exporting Countries (OPEC) further increases its oil production,” said Dr Fesharaki.
The price of light crude oil hit a record high of $ 42 a barrel, but has eased in recent days after OPEC announced an output increase.

Dr Fesharaki, the founder and president of Hawaii-based Fesharaki Associates Consulting and Technical Services, was in town to open the Institute of South-east Asian Studies energy forum series, which is aimed at educating the public on energy trends and issues. He has written extensively on the oil and gas industry and is a former president of the International Association for Energy Economics. He said that terrorism, although an important issue in energy security, has been over-emphasised.
“It would take a full assault by a major power like the US to stop the flow of oil from the Middle East to the rest of the world. Pipelines may get bombed but they can get repaired. It is more of a psychological effect than any actual full-scale physical disruption that a terrorist attack can cause.”

The perception that growing oil consumption in China as well as in the rest of Asia is fuelling oil price rises is also a myth, he argued.
“China's demand for oil grew by 450,000 barrels last year and that alone, although significant, cannot drive global prices up suddenly.”
He added that contrary to popular belief, Asia's demand for oil, with the exception of China, is not going to grow significantly.
“Asia is not burning. It only seems that way because China, which accounts for 70 % of the growth in Asia, has been demanding more.”

But with China trying to slow its economy down and reduce its reliance on imported oil as a result of strategic considerations, Dr Fesharaki expects a growth rate of only 2 % for Asia in the medium term.
“Japan's demand for oil has actually decreased with their increased reliance on nuclear energy while India's demand for oil has slowed considerably in the past few years and looks set to grow only moderately.”
This outlook belies the profitable oil-refining margins that most refiners in Asia are enjoying at the moment.
“By all means, dance when the party is still on but don't bet on current oil refining margins to be sustainable over the long term,” warned Dr Fesharaki.

The reason refining margins are exceptionally high is that the growth of the Chinese economy, which has been absorbing the region's excess capacity, has been unanticipated over the last year. But with the new refineries in China and India, capable of refining more than 1.5 mm bpd, due to be completed soon, there will be more than enough capacity to deal with the demand.
Oil storage is another aspect of energy security and Singapore has the potential to be the strategic oil storage hub for this region, much like Rotterdam in Europe. But while Singapore has the technical capacity to fulfil the role, it is a political and commercial challenge for such a project to succeed, said Dr Fesharaki.
“A lot will also depend on whether the oil exporters find it beneficial for them to participate in an oil storage project in the region.”