A matter of speculation

Sharp-suited men in New York, spivs in the City, keyboard warriors in the Australian Outback, the whole global conspiracy of oil market speculators has been rebranded. No longer are they the spawn of the devil, but handmaiden to the achievement of what Opec secretary-general Mohammad Barkindo calls “our common goal of restoring market stability and reviving much needed investment”.

Since Adam was a boy, Opec and (some) member country ministers have conjured up the bogeyman of speculators and money managers to explain away uncomfortable prices — high or low.

In March 2004, a closing Opec ministerial conference statement said: “High oil price levels remain predominantly a consequence of long positions of market speculators in the futures markets coupled with a tightening in the US gasoline market in some regions, and exacerbated by uncertainties arising from prevailing geopolitical concerns rather than purely a reflection of supply/demand fundamentals.”

Seven years later, then Opec secretary-general Abdullah al-Badri said: “Speculator activity on the Nymex has surged to record highs,” because of “concerns on supply further deteriorating beyond the current situation”. He said: “A risk premium of about $15-20/bl is currently embedded in the price.” He assured his audience that, “as Opec has indicated many times, there is no shortage of oil anywhere in the world, even with the partial absence of production from one of Opec’s member countries.”

Amid very different market conditions, last June’s Opec conference opening address noted: “It should be stressed that we do not believe that actual market fundamentals warranted the almost 60 per cent fall in prices that the market witnessed between June 2014 and January 2015. It is evident that speculators played some role in this fall.”

So, music to the ear on Sleazy Street, when today Barkindo told the IEA-IEF-Opec Symposium in Riyadh not only that: “Concerted efforts by the both Opec and non-Opec producers are already having a positive impact on the market as we see the onset of a more bullish sentiment emerging in the market,” but also that, “crude futures have rallied sharply to their highest levels in 18 months, and money managers’ bets on prices have reached new highs, providing an additional boost to ongoing gains in prices.”

Siding with the angels, the speculators are today a force for good, aiding the common cause of rapid market rebalancing.

Of course, as Argus has long argued, the reality is that the pricing power of non-commercial liquidity in the oil futures markets is very limited, for the obvious reason that for every long there is a short and for every short there is a long. Price formation — beyond very short-term noise — is ruled by underlying fundamentals. But the prosaic explanation is often more uncomfortable — and much less entertaining — than the mythical one.

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