Oil investors pulled $39 bn in futures, triggering decline

Commodity index investors, blamed for record oil prices, sold $39 billion worth of oil futures between their July record and September 2, causing crude to plunge, according to a report to be released today.

The work by Michael Masters, president of the Masters Capital Management hedge fund, blames investors who buy and hold an index of commodities for driving prices to records, and for their subsequent drop. It comes a day before the US Commodity Futures Trading Commission is set to discuss its own study of energy trading with a congressional committee.

Masters testified three times before Congress this year, arguing that limits on traders would cut oil prices to $65 to $70 a barrel. He has been cited by lawmakers who introduced at least 20 measures to curb speculation. Congressional pressure on the CFTC to step up enforcement and restrict anonymous trades has pushed index traders out of their positions, Masters said.

“I don’t think it’s just coincidence that the money came out after the pressure was put on these folks,” Masters, who wants legislation that would set limits on index commodity holdings, said in an interview.

Crude oil futures surged to a record $147.27 on July 11, an increase of 53 per cent for the year, on the New York Mercantile Exchange, then fell 26 per cent to $109.71 on Sept 2. Oil dropped $3.08 to $103.26 yesterday on the Nymex.

“The speculators that drove prices up basically deflated the bubble,” said Fadel Gheit, director of oil and gas research at Oppenheimer Capital in New York. They said, “That’s it, the game is over. We are going to bet on another horse.”

CFTC Report: The commission is expected to release a report tomorrow that will lay out its findings on the impact of index investors and over-the-counter trading on commodities.

Regulators may require Wall Street banks to regularly disclose their energy futures positions connected to the unregulated swaps market, according to people familiar with the discussions.

JPMorgan Chase and Co, Goldman Sachs Group Inc, Barclays Plc and Morgan Stanley control 70 per cent of the commodities swaps positions, and swaps dealers are the largest holders of Nymex crude oil futures contracts, Masters said.

Representatives for all four banks declined to comment. Banks enter into swaps with airlines and hedge funds to profit from moves in crude prices and then offset some of that risk in futures markets such as the Nymex.

“These large financial players have become the primary source of the recent dramatic and damaging price volatility,” Masters said in the report.

The commission has put out special requests for information from traders and imposed limits on the number of US oil futures contracts a trader can hold on Intercontinental Exchange Inc’s London-based ICE Futures Europe market.