'Virtual hoarding' by investors is monetizing oil

Slick Investors Strike Riches as They Cash in on Peak Oil

By Louise Armitstead
The Telegraph, London
Sunday, May 25, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/25/cnoil1...

Retail investors have joined a raft of hedge funds and pension funds in making millions of pounds by cashing in on the oil crisis.

Thousands of individual investors have piled into oil futures and have made as much as 200 per cent returns as the oil price soared to record highs in recent weeks.

Last week oil prices jumped 7 per cent, breaking three records and touching $135 a barrel on Thursday on new fears that supply is outstripping demand.

Clive Cooke, chief executive of City Index, the financial spread betting firm, said: "We've seen a big switch into oil -- it is now by far the biggest trade at the moment."

One trader said: "The price has doubled in a year. With leverage on top this has equated to huge returns and it's been a one-way bet all the way."

Commodity and energy weighted funds top the list of best performers in the world in the past month, according to the latest figures from HSBC.

Mulvaney Capital, which specialises in commodities trading, has generated 32 per cent returns this year in one fund. Others in the top 20 include commodity and trend specialists include Man Group's AHL fund, Winton Futures fund and Brevan Howard.

According to the figures from HSBC, the equity commodity funds have made almost half their profits in the past three weeks. For example, Oceanic has generated 4.7 per cent returns so far in May which account for the majority of its 6.5 per cent returns so far this year.

The funds stick out as success stories amid most global hedge funds that have posted some of their worst returns in years.

One prime broker said: "Hedge funds have piled in and we're seeing many making vast returns. Many are seeing the bet as a sure way to make up some of the losses incurred in recent months. They're pouring millions into the trade."

Cooke said retail investors have also been attracted by the apparently unstoppable price of oil. He said: "It was gold for a long time but once gold hit $1,000, investors started switching into oil. The stock market has been difficult to trade and people have been put off investing in individual stocks by the volatility. Oil and gold are more straightforward and retail investors love them."

Investment banks have also been betting their own proprietary funds on oil. Insiders said that many, in particular Goldman Sachs, have amassed super returns as a result.

The oil price hike has been fuelled by fears that supply is already out-stripping demand and will do so more radically in coming months, according to warnings last week from the International Energy Agency (IEA).

Fuel subsidies are common in Asia and the region will account for about 70 per cent of this year's expected 1.03m barrels-a-day increase in oil consumption, said the IEA.

Record prices have already resulted in lower demand in the US and Europe, which are free of subsidies, but demand is still rising in the Middle East and Latin America, where subsidies are also widespread.

A surprise drop in US crude oil inventories and data showing China's raging demand for diesel ahead of the Olympics fed the fears of a skittish market.

The price has also been fuelled by the investor money pouring into the market via special oil funds set up recently by large pension funds and institutional investors.

The price of long-term oil contracts outpaced the spot price, surging as much as 15 per cent as confidence that supplies could meet demand in the next five to 10 years crumbled.

A recent note by Goldman Sachs said that the surging number of traders and speculators was fuelling the oil price in the same way as they did in 2004 and 2005.

Michael Masters, a hedge fund manager, estimates the wall of money invested in commodity index-tracking funds has risen from $13 billion in 2003 to $260 billion by March this year. "Individually, these participants are not acting with malicious intent. Collectively, however, their impact reaches into the wallets of every consumer," he warned. Critics call this "virtual hoarding" and point to the surplus of current supply as evidence that the futures market has become separated from the fundamentals of supply and demand.

Last week Nymex July West Texas Intermediate settled at $132.19 a barrel, a 4.7 per cent rise over the week. ICE July Brent closed at $131.57 a 5.3 per cent rise on the week.

The prices for diesel, heating oil and gasoline hit record highs and ended the week up 6.7, 7.2 and 4.2 per cent respectively.

Edmund King, president of the AA, has written to the chancellor, Alistair Darling, asking him to delay a 2 pence-a-litre rise in fuel duty planned for October, and to launch an inquiry into the oil-refining market in the UK.

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