Oil gets “evil speculator” buy signal
James Saft is a Reuters columnist. The opinions expressed are his own.
HUNTSVILLE — If history is any indication, the Obama administration’s investigation into oil speculators makes now a potentially great time to load up on oil futures.
The Justice Department on Thursday announced a working group to probe fraud, speculation, index trackers and “investor practices” in the energy market, a move taken after gasoline prices topped $3.80 per gallon, the highest in almost three years and a politically very inconvenient fact.
Authorities playing the “evil speculators” card is an excellent indication that they have both lost control of the narrative and have little they can do to alter the policies and fundamentals that brought on the pesky high, or sometimes low, prices in the first place. The right play could just be to take this as a signal that prices are going to continue to annoy authority, and make your investments accordingly.
It is not too hazardous a guess to say that the main drivers behind high energy costs are conflict in oil-producing countries like Libya, growth-driven demand in emerging markets and exceptionally loose monetary policy, specifically quantitative easing.
Gunning for oil speculators during QE is a bit like laying out mouse traps while also choosing to store your cheese on the kitchen floor. It would be far simpler to put the cheese in the fridge. Of course QE is under the control of the Federal Reserve, so hence we have blather about speculators.
There have been two notable campaigns of speculator-hunting in the past two years; If we want to know which way oil prices will go perhaps it would be a good idea to review their success.
In February of 2010, with Greek and other weak euro zone bonds under increasing pressure, Germany launched an investigation into credit default swap trading, while earlier in the month there were reports that Greek and Spanish intelligence services were probing speculative attacks on their own bonds and derivatives.
All of this, of course, had about as little effect as persecuting the widow next door because your cow has gone dry, so come May the EU and its partners announced a multi-pronged $1 trillion bailout aimed at curbing “wolfpack behavior” in financial markets. This, of course, was after Greece sought the activation of a bailout in April of 2010, after downgrades and sell-offs raised its borrowing costs to unsustainable levels.
The anti-wolfpack bailout package was such a success that Greece, Ireland and now probably Portugal have sought help for their problems, which after all were not caused by speculators but by their own insolvency. Speculators would have been forgiven for putting on extra shorts on euro zone peripheral bonds in the winter of 2010 when they heard they were under attack, and would have done quite well out of it.
FOOD, TROUBLESOME FOOD
In November Chinese authorities announced a “one-two punch” on spiraling food costs, including a crackdown on speculation in agricultural commodities and the imposition of price controls. In addition the commerce ministry warned that it would track down any speculative inflows into China that were trying to pose as foreign direct investment. This came after the food portion of Chinese CPI hit 10 percent in October, with notable spikes in traditional and luxury foods.
Well, even China, a one-party state with vast power over its citizens, found its ability to tame speculators was limited, or rather perhaps that speculators were not the true driving force behind the rise in the price of food. Food costs gained 9.7 percent in March, moderating from the surge of 10.2 percent in February, as vegetable prices fell 7.9 percent. As the first single-digit food inflation figure in five months this was encouraging, but still a hefty figure.
That’s likely because the real causes of Chinese food price gains were to be found in the fundamentals and in its own and other’s official policies.
If you had made bets on Chinese inflation plunging based on faith that the “one-two punch” would work, you would have been disappointed.
So really, the lesson here is not that prices will go up just because authorities cry “Speculator!” but rather that this is an excellent indication of a set of thorny causes that will not easily be uprooted.
The one that the U.S. has the most control over that could have a short-term impact on oil (and no, it’s not drilling rules) is monetary policy. QE is driving down the value of the dollar, and driving up the value of real assets when counted in dollars.
It is also an invitation to the traders of the world to take on risk. This they have done, and one of the byproducts is expensive oil. It seems churlish to complain. Perhaps it would be better to end the policy, rather than rail at its fruits.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)