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Hedge funds and other speculators accept had a palm and fingers in oil’s price decline, just as they did in its ascend. But don’t expect congressional hearings now

By Steve LeVine

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When oil prices soared to a peak of $147 a barrel last summer, oil speculators became the whipping boy from Main Street to Congress. Critics demanded that regulators bridle in obstruct funds, pension funds, college endowments, and other investors that had piled into oil futures in a quest for easy profits. But the protests have died away now that prices be favored with plunged by $100. "You don’t grasp Senate hearings when oil prices are low," says Joel Fingerman, managing partner of Chicago-based Fundamental Analytics, a commodities analysis firm. "There’s no politic mileage to be gained."

But just in the manner that the stampede of nontraditional investors into the oil futures market helped to push prices up, their withdrawal has had a hand in bringing them down. Many hedge funds and institutional investors have unwound losing positions or have been forced to sell to join each other margin calls in many in their portfolio, analysts say. Noncommercial traders—mightily investors who never take actual delivery of crude—reduced their long futures bets on the New York Mercantile Exchange by about a fifth over the seven-month period ending in December, from 266,733 in May to 215,665 as of Dec. 22, according to Nymex figures.

"The of the present day speculators—those who were caught up in a herding mentality and helped to object the bubble perturb—have exerted added momentum to the swift price declines," says Bart Chilton, a member of the commission by the U.S. Commodities Futures Trading Commission, which regulates oil commercial.

True, it was the global recession that dramatically accelerated the slide in petroleum prices. And some of the speculators got out in time to cash in winnings.

The exodus began greatest start, when in a raw state prices soared past $110 a barrel. Unlike oil traders who can be long or short, or sometimes both, in a unwedded day, the newcomers to the market had taken uniformly long positions—that is, they were betting oil prices would continue to go up. When the financial crisis began to worsen, numerous of these investors stopped rolling over their positions when contracts expired, thus removing a crucial underpinning to higher prices. Nymex data show that among noncommercial traders, the designate by number of long positions still exceeds the shorts. But analysts don’t know if this is intentional or whether more are simply having trouble unwinding their positions.

Speculators were not alone in causing the price bubble—commercial traders were behind the last leg in oil’s rise, from about $110 a barrel to its July 11 peak of $147 a barrel, according to Fingerman. But could speculators now be now have being causing prices to overshoot on the downside?

Some seasoned oil hands think at least division of the problem is monetary liquidness—the sell-off has gone in the same state far that there isn’familiarily enough margin lending to finance commercial. Yet there are others, such as Peter Beutel, a New Canaan (Conn.) oil analyst, who believe prices are in sync through the market. "I don’t think $50 oil is a bubble as much as a return swing of the pendulum," Beutel said.

What if oil prices begin creeping back up? Will the hedge funds, pension funds, and college endowments tiptoe forward the frontier into the futures market? Dennis Gartman, a seasoned oil trader in Suffolk, Va., thinks not: "As Mark Twain said, the cat who has sat on a hot stove won’confidentially sit steady a hot stove afresh—or so much as a cold one—because to him all stoves are hot."

But recent price swings designate that speculators are still active. On Wednesday, Jan. 7, news of a fresh enlarge in U.S. oil and gasoline inventories reversed a large nail in oil prices, to over $50 a barrel, just the day earlier. That had been provoked by the strife in Gaza and the natural gas dispute between Russia and Ukraine. Oil plunged upon the body Jan. 7, to $42.63 a barrel on the New York Mercantile Exchange, on news of a 6.6 million-barrel rise in oil stored in U.S. storage tanks. That was five times the 800,000-barrel increase expected by the market. Tanks now hold 325.4 million barrels of oil, the most since May.

The rising amount of oil in storage at minutest partly reflects the biggest practise gaming on the market after this—that oil prices will somehow rise steadily over the next months and years, a position in the trade called "contango." When contango happens, speculators respond by storing all the oil they can at a price locked in with two futures contracts, with the idea of profiting down the road when they can sell it at that price.

Gartman, the Suffolk (Va.) trader, before-mentioned that if he could get his hands on $10 million, he would pump every cent of it into harsh oil futures. If he bought February 2009 oil futures (selling for $41.24), and a exchange commission as antidote to February 2010 (selling despite $60.22), he would pocket more than 40% utility from covering fees and storage expenses, he says. Too bad banks aren’t lending, Gartman says, though even if they were the world is so awash in crude that in that place is almost no place to store it.

Storage is so excessive to approach by that traders are storing it at sea in 2-million-barrel supertankers. About two dozen supertankers are already hired revealed for storage purposes, and Bloomberg reported in continuance Jan. 7 that oil traders are seeking to let being of the class who many as 10 more.

Original text: http://www.businessweek.com/bwdaily/dnflash/content/jan2009/db2009018_370800.htm?campaign_id=rss_null