Is Oil the Next 'Bubble' to Pop?
By GUY CHAZAN and NEIL KING JR.
June 4, 2008; Page C6

Is there an oil bubble that is about to burst?

Some big voices on Wall Street think so, predicting the oil market could tilt sharply south soon if the U.S. dollar strengthens and demand for crude oil weakens in some key consuming countries. Tightness on the supply side could also ease, they say, as some big refineries and new oil fields come onstream over the next few months and the outlook for the Chinese economy clouds over.

But don't count on a price plunge just yet. While oil has eased off its record of just over $133 nearly two weeks ago, to $124.31 currently, there are still strong reasons to believe that the benchmark U.S. crude could hover at about $120 a barrel well past summer.


At issue are deep disagreements over what is driving the run-up in oil prices.

In the search for scapegoats, many on Capitol Hill in the U.S. and elsewhere are now blaming oil-futures speculators, noting the vast cash inflows into commodity index funds. But those skeptical of a sharp price fall point to a raft of continued gloomy news on the fundamental supply-and-demand side, arguing that an already tight market isn't likely to loosen for months.

Like the Dot-Com Boom?

The bearish argument has grown increasingly loud over the past week. Lehman Brothers on Friday compared the rally to the one-upmanship of the dot-com boom: Wall Street analysts have repeatedly raised their price forecasts as oil prices have soared, driving new investor flows that have pushed prices to still-higher levels, leading to still-higher price forecasts. Lehman sees the "classic ingredients of an asset bubble," with financial investors driven by a "herd" instinct and chasing past performance.

Hedge-fund manager George Soros also has chimed in. "We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble," he said Tuesday in prepared testimony before the U.S. Senate. Mr. Soros cautioned, though, that a crash in oil markets was "not imminent."

Economists who have cited the dollar's fall as a key factor in the rising price of oil now argue that that linkage is set to reverse. With the dollar now showing signs of strength, and the fears of inflation ebbing, oil prices also should fall, they say. Federal Reserve Chairman Ben Bernanke's comment Tuesday that further interest-rate cuts are unlikely gave the dollar another upward jolt.

To back its dot-com analogy, Lehman Brothers cites evidence that institutional investors, including sovereign-wealth funds, have been increasing their exposure to commodities. The investment house calculates that from January 2006 to mid-April 2008, more than $90 billion of incremental investor flows was devoted to assets under management by commodity indexes. It said for every $100 million in new inflows, the price of West Texas Intermediate, the U.S. benchmark, increased by 1.6%.

Yet others dispute the view that the run-up in crude oil is investor-driven. "This is the price you get if supply doesn't expand for five years and demand continues to grow as it has done for the last four to five years," says Paul Horsnell, an analyst with Barclays Capital in London. Prices will "continue testing upward" unless the supply-and-demand picture changes substantially, he says.

Others have also disputed the evidence that investors are driving up the price of crude.

In written testimony to the U.S. Senate last month, Jeffrey Harris, chief economist of the Commodity Futures Trading Commission, said that while futures-contract prices for WTI have more than doubled during the past 14 months, managed-money positions, as a fraction of the overall market, have changed very little.

"Speculative position changes have not amplified crude-oil futures price changes," he wrote. "More specifically, the recent crude-oil price increases have occurred with no significant change in net speculative positions." He also said there was no evidence that position changes by speculators "precede price changes" for crude-oil-futures contracts.

Seeking Their Footing

Mr. Horsnell and others contend that after their precipitous rise to $133, oil prices are now seeking a new equilibrium. Even the normally bearish Energy Department doesn't see prices falling far soon. Guy Caruso, head of the department's Energy Information Administration, cited continued tight global supplies Monday when he predicted that oil will stay above $100 a barrel through 2009.

The main factor cited for sustained high prices is the surprisingly steep fall so far this year in production from some of the world's key exporters, particularly Mexico, Russia and Venezuela. The big producers within the Organization of Petroleum Exporting Countries have largely held their output steady since late last year.

Despite declining demand in the U.S., the thirst for petroleum products -- above all diesel -- continues apace in much of the developing world.

China's Needs

Rocked by the recent earthquake, China is now scrounging for all available sources of diesel to power thousands of generators that have taken the place of downed power plants. Surging domestic demand among Persian Gulf countries also continues to nibble away at available oil exports.

"What will turn this around is a real change in what has pushed this up in the first place, which would be a notable shift on the supply-demand front," said Mr. Horsnell. "So far, we aren't seeing that."

Lehman is in the camp that expects the supply-demand balance to change in the coming months. New Saudi oil production should come onstream soon, as well as big new refineries that will ease bottlenecks and bring greater competition in oil-products markets. Russia is enacting tax breaks that many hope will lift stagnant oil production.

Meanwhile, oil-demand growth is expected to ease in fuel-hungry China, as the economic slowdown in its Western export markets takes hold. China also has been stockpiling fuel in the run-up to the Olympics, and with the Games over, imports might slow.

All this could "set the stage for a significant correction" in the oil price, says Michael Waldron, an analyst with Lehman. Yet even he predicts that may not happen before the end of the year.

Write to Guy Chazan at guy.chazan@wsj.com1 and Neil King Jr. at neil.king@wsj.com

Commodities Regulator Seeks
More Disclosure From Traders
CFTC's Move Aims
To Quell Concerns
About Volatility

By BILL TOMSON and RYAN DAVIS
June 4, 2008; Page C6

The Commodity Futures Trading Commission said Tuesday it wants to monitor some traders more closely as the regulatory agency sought to quell concern about volatility in commodity-futures prices and complaints index funds are inflating prices.

The CFTC is developing a proposal to make index traders and swap dealers divulge more "detailed information" as well as possibly submit to a new type of classification. The regulator also is rethinking policy that would raise speculative limits on some agriculture-commodity index traders.

"As part of this data gathering and policy review, the commission will be examining the policy of CFTC staff granting exemptive relief from the CFTC's federal speculative position limits relating to agricultural commodity index trading," CFTC acting Chairman Walt Lukken said. "During this review period, the commission will be cautious and guarded before granting additional exemptions in this area."

Mr. Lukken acknowledged the link between the speculative activity of index traders and rising agriculture-futures prices. He said now would be "bad timing" to raise speculative limits "given record-high prices for most commodities."

The CFTC also expressed concern over the availability of credit for farmers and grain handlers. Rising grain prices and market volatility have led to higher margin requirements for futures trading, making it more expensive to hedge production. Commissioners are directing the CFTC to create a proposal to allow for the clearing of agriculture swaps, which are over-the-counter trades.

"This initiative will provide farmers and grain merchandisers with another choice for managing price and basis risk with the benefit of centralized clearing and the regulatory transparency that accompanies clearing," the CFTC said.

The CFTC also acknowledged it was investigating suspicious trading activity in the cotton-futures market, which occurred in February and March. Normally, the agency doesn't disclose market investigations, but the CFTC said it revealed the investigation "because of today's unprecedented market conditions and concerns expressed by market participants at the commission's agriculture roundtable."

In April, the CFTC hosted a public meeting regarding concerns the agriculture markets weren't operating efficiently. The CFTC said the investigation is focused on "ensuring that the markets are properly policed for manipulation and abusive practices."

Cotton futures on ICE Futures U.S. spiked in late February and into early March when the July contract reached its highest level in more than 12 years. The price climbed as high as 94.52 cents a pound even though the supply and demand fundamentals didn't justify a sharp rally. That peak was followed by a massive drop -- roughly a third of the contract's price -- as traders said funds liquidated positions. ICE July cotton Tuesday settled at 64.32 cents a pound.

"It would be surprising if they hadn't [investigated] given what happened back in March," said John Flanagan, president of Flanagan Trading in Fuquay-Varina, N.C.

ICE said in a statement Tuesday that it is "actively working" with the CFTC in its investigation of the cotton futures market, but declined to comment further.

Prior to the announcement there were some concerns the CFTC would discourage speculative trading in commodity markets, but that doesn't seem to be the case.

"I haven't seen anything [in the CFTC initiatives] that would chase speculators out" of futures markets, said Sharon Johnson, senior cotton analyst at First Capitol Group.

In commodity trading Tuesday:

CRUDE OIL: Futures dropped precipitously, closing below $125 a barrel for the first time in 2½ weeks on signs that consumption is choking on record prices. Light, sweet crude oil for July delivery settled $3.45, or 2.7%, lower at $124.31 a barrel on the New York Mercantile Exchange.

GOLD: Prices fell as the dollar strengthened after Federal Reserve Chairman Ben Bernanke said the dollar's long-running slide led to an "unwelcome" rise in U.S. inflation. This was construed to mean no more rate cuts that might undermine the dollar, along with ideas that a firmer dollar would mean less currency-induced inflation. Nearby June gold lost $11.30 to $881.60 an ounce on the Comex division of the Nymex, while most-active August gold fell $11.50 to $885.50.

Write to Bill Tomson at bill.tomson@dowjones.com1

Senator Increases Pressure
On Oil-Market Regulator

By IAN TALLEY
June 4, 2008; Page C6

WASHINGTON -- Washington's push for tougher measures to rein in energy and agricultural commodities markets gained steam Tuesday.

Sen. Maria Cantwell (D., Wash.) said she is prepared to hold up appointments to the agency that regulates energy and commodities futures trading if it doesn't strengthen crude-oil market oversight.


Sen. Cantwell said she would prevent the appointment of the chairman of the Commodity Futures Trading Commission unless the agency acted to regulate U.S. crude-oil contracts traded on foreign boards of trade.

The senator said she will also push for the Federal Trade Commission to issue a temporary rule that would allow the agency to start an investigation into possible wholesale-petroleum-market manipulation, combining its oversight powers with the CFTC, which last week announced a broad-based probe into oil markets.

Sen. Cantwell led a Senate Commerce Committee hearing on speculation in the energy market where experts, including billionaire investor George Soros and a former senior CFTC official, said the lack of oversight in the markets has contributed to an oil-market bubble that threatens to pull the U.S. economy into a recession.

In interviews before and after the hearing, Sen. Cantwell said she is prepared to delay the Commission appointments -- including the appointment of acting chairman Walter Lukken to full chairman -- until the CFTC acts.

"If that's what it takes to get the CFTC to do their job, we'll use every tool we have," Sen. Cantwell said.

As oil and food prices have risen to record levels, members of Congress have called for tougher measures to curb financial speculation in key commodity markets. Many economists and industry players say the impact of speculative investing on commodity prices is small compared with the pulls of supply and demand.

But the view that speculation is fueling high commodity prices has gained political traction, and got another boost from Mr. Soros.

Mr. Soros told a Senate subcommittee that commodity index funds are helping to create a bubble in the crude-oil market and should be "discouraged" from being able to participate in the market.

Congress and regulators should be careful, Mr. Soros warned, when considering how to discourage commodity index-fund trading. Forcing participants, such as pension funds, to halt speculation in commodities could divert them into unregulated markets that are less transparent, Mr. Soros said.

Write to Ian Talley at ian.talley@dowjones.com1

Looks like the "review of trades" is causing a lowering of oil futures!

The "$11 Spike" is showing how vunerable the oil sector is.....imagine even the "Oil & gas Funds" took a dive yesterday.

Skadden Lawyer Delves Into the 'Dark Pools' of the Oil Boom
David Bario
06-19-2008

With crude oil prices hovering near $140 a barrel and gasoline selling for $4 a gallon, there's growing pressure from American consumers and businesses on lawmakers to end what is seen as excessive speculation in the commodities markets.

Regulators at the Commodity Futures Trading Commission have been scrambling to react. On Tuesday, the CFTC announced an agreement with London-based electronic exchange ICE Futures Europe to extend limits on oil contracts traded in the U.K., as The Wall Street Journal reported Wednesday. And as Reuters reports, lawmakers would like to limit the volume of commodities trading taking place in so-called dark pools, beyond the reach of U.S. regulators.
The Am Law Daily called Philip McBride Johnson, a former CFTC chairman under President Reagan, for some answers. Johnson now heads Skadden, Arps, Slate, Meagher & Flom's exchange-traded derivatives practice -- he's the guy to call if you don't want trouble from the feds over your oil trades (or if you're setting up a foreign exchange and you don't want trouble with your U.S. counterparts).

What do you make of the huge increase in oil prices and the rising concern over speculation in the commodities markets these days?

The CFTC's economists are saying that supply and demand seem to be driving this. But we have clients in the business that have experienced these markets for many, many years, and what I'm hearing from them is that they don't see any change in the fundamentals of supply and demand.

Is it a matter of institutional investors seeking shelter from the subprime crisis and the credit crunch?

I don't know. But I do know that speculators as a class do not agree on anything, and yet there is almost unanimity of opinion these days -- and the money to make the opinions matter. The fact that prices have been relentlessly trending up suggests a new type of market participant [with] a mentality that is traditionally more in line with investing in securities than trading in commodities. If enough of these wealthy people, or funds, or other entities with a lot of capital decide to flip out of securities for a little while and go into commodities, and they're all looking for something that is going up, and you get enough billions of dollars thinking that way, then their wish comes true.

What role might the CFTC play in controlling the markets?

In 2000 Congress decided that there were certain kinds of high-end investors that were big enough and smart enough that they shouldn't be constrained to do all their business on the exchanges. The situation now is that the CFTC is sitting there looking at one screen, one piece of the picture, which is whatever is happening on the exchanges. Meanwhile, an increasing volume in dollars is taking place in the form of over-the-counter activity where no one can see it.

The CFTC very recently gained some authority over exempt commercial markets like ICE that are designed to put those markets on the same screen as the futures markets. That is a positive development. But there is still a blind spot with respect to the true over-the-counter activity that is going on, which represents billions and billions of dollars. So I think Congress is quite keen on making sure there is someone, preferably the CFTC, who has better information on what is going on out there.

You're saying that a third or more of all trades are basically invisible to the government?

Except to the degree that they are able to buy, borrow or steal information. They don't call them "dark pools" for nothing.

What's the benefit to the traders or speculators of staying off the exchanges?

Some would say they remain invisible. Also, the CFTC rules are complicated and they are fairly intrusive, and if you're doing stuff on an exchange, then you've got to hire somebody. You need Phil Johnson.

Will prices eventually come back down?

I think the markets will eventually settle down. The commodity markets have always had a reputation for being volatile, but this is ridiculous. It would be wonderful if we had confidence of knowing that there was somebody there who has a complete picture of everything that's going on in the purchase and sale of crude oil, or natural gas, or wheat or corn. That would be a wonderful outcome.

Confidential World Bank Report Says Biofuels Have Boosted Global Food Prices 75 Percent

July 4, 2008 1:02 p.m. EST

Linda Young - AHN Editor

Washington, D.C. (AHN) - Urgent world action is needed to deal with global food price hikes of 75 percent that have been caused by diverting crop production from food to biofuels, World Bank officials said in a confidential unpublished report.

A new report by the World Food Bank debunks U.S. Pres. George W. Bush's assertion that demand for food in India had caused global food price hikes and reveals that demand for biofuels to fuel vehicles is responsible for the food crisis.

The unpublished confidential report was compiled by a leading economist at a global financial institution, and obtained by the Guardian newspaper. It reported on Friday that the economist's analysis is more complete than previous assessments and that he found that the Bush administration's claim that biofuels had only driven global food prices up by 3 percent was way off. In fact, the economist found that the true impact of biofuels was to boost food prices by 75 percent, the Guardian reports.

There is speculation that World Bank has not released the April report in order not to embarrass President Bush.

While still keeping mum about the report on Wednesday, World Bank Group President Robert Zoellick issued a call ahead of the upcoming G8 meeting in Japan on Monday for world leaders, as well as the major oil producers, to act immediately to deal with the twin problems of soaring global food and energy prices.

Zoellick said that although the World Bank was increasing its grant aid to many countries that urgent new requests for help had outpaced its resources.

Earlier this year, hungry people in various nations around the world rioted over their lack of food. Observers fear that the growing crisis will destabilize governments in many nations and lead to widespread global conflicts.