By LYNN J. COOK
Houston Chronicle
Crude
oil prices have slumped $8 in the past 13 days of
trading. At first blush it sounds dramatic. But
considering the number of big speculators who have
become a factor in the market, a 14 percent
short-term drop in price off record highs shouldn't
be a surprise.
Hedge
fund managers and other buyers trying to make bets
on crude oil price swings have rushed for the door.
The U.S. Commodity Futures Trading Commission
reports that speculators decreased their net long
positions — which pay off if crude prices rise — by
75 percent in the week that ended on Election Day.
That's the smallest speculative position the market
has seen all year, suggesting they saw prices near a
peak.
On
Thursday, the price of West Texas Intermediate crude
traded on the New York Mercantile Exchange dropped
another $1.44 to close at $47.42. Signs that fears
of shortages were overstated have spurred a retreat
from the recent price peaks.
And
Wednesday, the International Energy Agency said the
world's biggest economies are slowing down. The
agency's report said stockpiles of steel and coal
stocks are building in China, a signal that
white-hot economy might finally be cooling off.
Third-quarter numbers from Europe's largest economy,
Germany, show slowed growth.
For
oil traders, a slowdown suggests oil demand won't
grow so fast, a strong argument against predictions
of crude oil shortages ahead.
Long-term projections aside, oil traders still have
their eyes squarely on distillate fuel inventories
in the United States because that's where heating
oil comes from. Those stockpiles dropped for a sixth
straight week, leaving inventories 15 percent lower
than last year.
Winter at the door
Analysts say traders aren't worried that refineries
will have trouble meeting demand, but a cold snap
could change oil's outlook entirely. Some 80 percent
of heating oil is funneled to residential customers
in the Northeast where warmer than normal
temperatures are forecast for the next week.
Analysts warn that a hard freeze in New York, just
like a supply strike in Nigeria or pipeline sabotage
in Iraq could easily counter oil's latest downtick.
Despite the recent slide, the price of West Texas
Intermediate crude — the darling of oil commodities
— is up 52 percent over this time last year. It is
the world's most expensive crude but accounts for
just a fraction of the 80 million barrels pulled
from the ground every day.
Other
kinds of crude from the Middle East, Latin America
and Africa are priced at discounts to that benchmark
crude because they can be harder to refine. Even so,
those crudes cost more than they did a year ago, and
their prices sink and swell alongside West Texas
Intermediate.
The
hedge fund factor
The
amount of money chasing these moves has risen with
the arrival of hedge funds, which cater to the most
affluent clients and play a wide range of markets.
Hedge
funds, flush with billions of new investment
dollars, have made with sexy energy shares in an
otherwise unremarkable stock market. The S&P Energy
sector is up 27.7 percent for 2004, compared with a
5.4 percent increase in the S&P Composite 1500.
It
makes sense they would go another step in the chain,
directly to the commodity, said energy analyst David
Pursell of Houston-based Pickering Energy Partners.
He
said hedge funds don't drive crude prices so much as
call shotgun for the ride.
"You
could call it fast money. Clearly it has an impact,"
he says. "But I would argue it's all part of an
efficient market."
Howard Newman, vice chairman of private equity
investment firm Warburg Pincus, isn't so charitable.
He said speculators have done more than just help
prices move and asked why a paper trader needs to
pay hefty premiums today when the market is
well-supplied.
Newman never bought into the idea that crude prices
could only go up.
