Jim Devine wrote:
> some of the gyrations are due to OPEC. But they are just a piece of
> the puzzle, a smaller one than in the 1970s.
>
.
Saw an article yesterday in the SF Chronicle wherein bespoke an oil analyst:
``The fact that OPEC are cutting, and frankly scrambling at the minute
to try and rein in the market, has suggested the world is well-supplied
of oil,'' said Neil McMahon, a London-based analyst at Sanford C.
Bernstein. ``They are producing far too much.''
That's his opinion, but there are other factors besides production
affecting prices:
...and it all distills down to #2 fuel oil, 'bunker' fuel, and
Gas-O-Line as far as the consumer-on-the-street notices directly.
No one notices the gamblers, movers, shakers, hedgers, and the rest of
the financial derivatives crowd... How many billions of dollars in
imaginary capital move everyday on those markets?
Also... speaking of corn derivatives (yeah, it's a stretch) More on
tortilla wars:
Guadalajara Reporter:
Corn costs fuel price hike fears
Story by : CR STAFF
Sharp hikes in the cost of corn have prompted mom-and-pop tortilla
producers to raise the price of the Mexican staple to over nine pesos a
kilo, fueling fears that increases in other food products, such as milk,
eggs and poultry, are just around the corner.
A corn shortage that began in the last half of 2006 has pushed up the
price of corn to record levels – around 1,800 pesos a ton. Corn is an
essential part of Mexico’s food chain, and its value affects the cost of
dozens of products.
[...] <http://www.guadalajarareporter.com/fullcover.cfm?id=2>
Same Crowd Behind Oil Rise Now Sells Out
Large Investors Got In, Find 'Rollover' Costs Too High to Stay On
By ANN DAVIS
January 9, 2007; Page C1
The chart:
http://online.wsj.com/public/resources/images/MI-AJ975_OIL_20070108202826.gif
Crude oil's run last year to close to $80 a barrel drew cries that
bullish investors were creating a commodity price bubble. Now it looks
like some of the same investors could be accentuating crude's downward
slide.
The appeal of holding oil as an investment has changed. Oil itself is
losing value -- crude-oil futures yesterday closed at $56.09, down 27%
from a July 14 peak on the New York Mercantile Exchange, mainly as
mild winter weather reduced heating demand.
Moreover, investors are finding it costs a significant amount of money
to keep skin in the game in the oil futures markets during the
decline. Unlike the stock market, even if crude goes nowhere in 2007,
investors employing a buy-and-hold strategy will actually lose money
because of the heavy costs of holding oil futures investments.
[Cheaper Today]
"A lot of people came into the start of the year expecting funds and
investors to continue putting more money into crude and continue
buying commodity futures," says Ben Dell at research firm Sanford C.
Bernstein & Co. But, he adds, "if you're losing money month in and
month out, you probably don't want to own it."
Oil-futures contracts expire every month. Investors holding the most
current contracts have to buy new ones to replace them if they want to
maintain their positions. In the past couple of years -- in part,
because of the influx of financial investors making long-range bets --
these contracts have gotten pricier the further into the future they
are scheduled to be delivered, something known as contango. That
raises the cost of keeping a position in the market. It's almost like
the difference between walking a mile, and walking a mile uphill.
About two years ago, spot prices of crude were higher than future
months, something known as backwardation, which boosted investors'
returns every month.
In practical terms, for most investors with oil in their portfolio,
the cost of rolling over the expiring near-month futures contract into
the one for the next month's delivery is now more than $1.25 a barrel.
The price of oil could be unchanged at $50 per barrel, and an investor
would still lose 2.5% because of these costs.
The current pain shows up in the Goldman Sachs Commodity Index. It has
a roughly 68% allocation to energy futures and fell 15.1% in 2006,
thanks in part to the heavy cost of rolling over crude-futures
contracts. By contrast, funds linked to the Dow Jones-AIG Commodity
Index, which has only about a 33% energy weighting, made 2.1% last
year. Other commodity-futures contracts currently aren't as expensive
to roll over as oil.
This is affecting large institutional investors, such as pension
funds, which have been pouring into commodities in recent years,
seeking to diversify their portfolios. A few years ago, they were
happy to pay the "roll cost" to hold oil, because its price was rising
and canceled out carrying costs in the futures markets.
From 2004 to 2006, according to Bernstein research, investments linked
to broad-based commodity-market indexes jumped from roughly $45
billion to $110 billion, with about half of that increase pouring into
the energy markets.
But oil's recent slide has given many investors the jitters. Crude oil
fell 8.9% in the first two trading days of 2007 and ended last week
down 7.8%. Oil fell 22 cents a barrel yesterday, to its $56.09 close
on the Nymex.
Nobody is predicting an end to investors' interest in commodities as a
way to diversify their portfolios. The California Public Employees'
Retirement System, or Calpers, approved a pilot program this past fall
to invest directly in commodities-futures markets, and it is one of a
growing number of pension funds planning to devote a much larger
allocation to the sector.
But these investors also may seek to adjust their allocations to
indexes that are less energy-focused than, say, the Goldman index.
Because roughly $60 billion is invested in funds linked to the Goldman
index, pulling out or switching allocations rapidly could cause
further downward pressure on the oil markets, some traders and
economists say.
"All the energy centric indices did not do well in 2006. As a result
one could expect less money to flow into energy-heavy indices this
year," says Harry Arora, head of ARCIM Advisors, a commodities-focused
hedge fund in Cos Cob, Conn. Rollover costs are "eating up the returns
for the index guy."
Meanwhile, another big question mark is hanging over the market:
rising inventories.
Global storage statistics are widely open to debate, and experts
disagree on how full inventories are, because a lot of it is
controlled by governments and oil refiners and producers.
But a report published last month by Bernstein attempted to quantify
just how full storage is in independent, commercially operated storage
terminals that traders can use. The research firm's answer as of
December: 97% is full, up from 85% 18 months ago and around 70% in
2003.
In pockets of the world where storage is especially full, supplies
could flood the market and depress prices, Bernstein analysts contend.
A different set of financial speculators -- including hedge funds and
trading firms that buy and sell physical barrels of oil -- have been
investing heavily in crude inventories because of the futures market
phenomenon.
These speculators enter a contract to sell oil months or years into
the future. Then they fill their tanks with oil that they buy more
cheaply on the open market. The difference between oil delivered next
month and that for August delivery, for example, is roughly $5 a
barrel. These speculators pay a few dollars for storage, but still
pocket a few dollars a barrel in profit.
Some economists think this strategy could unravel should storage
facilities fill up.
Philip Verleger, an independent energy economist who heads PK Verleger
LLC, has warned that oil markets could collapse from excess inventory
coming on the market and index investors pulling back from oil due to
the unattractive economics of holding it.
--Bhushan Bahree contributed to this article.
Write to Ann Davis at [EMAIL PROTECTED]
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