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| How Hot Money Inflames Oil Prices |
| 2006-10-11 |
| Hedge funds and other investors may have helped push oil prices up. Now, they're helping push them down—and fast There's been an ongoing debate since energy prices began their steep rise four years ago: Was the money pouring into the oil patch from mutual funds, traders, hedge funds, and other financial players pushing up the prices that consumers pay to heat their homes and fill their gas tanks? In other words, was hot money behind the sharp rise in energy prices? Well, now the hot money is moving out of energy, and it seems clear that it's adding just as much volatility to prices as they move down as when they were moving up. Without any major changes in supply or demand, the price of oil has been tumbling, dropping below $59 on Oct. 3. That's 25% off the peak of $78 in July. Natural gas prices have fallen even more sharply, to $5.80 per million Btus from $15 last December, a drop that likely precipitated the $6 billion blowup at hedge fund Amaranth Advisors. DOWNWARD TUMBLE. Behind the price declines is a sharp contraction in the amount of money being invested in energy assets. The amount of new money flowing into the 48 natural resources mutual funds followed by Morningstar slowed to just $12 million in August, down from $1.6 billion in the same month in 2005. The PIMCO Commodity Real Asset fund, which saw its assets swell to $12 billion since its startup in 2002, has taken in just $100 million this year. "There's been a big money exodus," says Peter Fusaro, founder of the Energy Hedge Fund Center, an energy trading information site that tracks hedge funds. "Many investors took profits and are sitting on their powder." (Figures for September money flows are not yet available.) Energy prices have fallen so fast that they've prompted OPEC member countries into action. In September, Nigeria and Venezuela said they would make voluntary reductions in production in hopes of propping up prices. Edmund Daukoru, OPEC president and Nigerian Minister of State for Petroleum, called on other OPEC countries to follow suit. This is all a sharp reversal from the money pouring into energy investments in recent years. Chicago-based fund tracker Hedge Fund Research now counts 68 hedge funds devoted purely to energy, up from 14 in 2000. That number doesn't count the many funds—such as Amaranth—that invest only part of their money in oil and gas. Nor does it include the $100 billion that poured into funds that passively track commodity indexes. "Out of every dollar that gets put in the Goldman Sachs Commodity Index, 70 cents goes into energy," notes Sol Waxman, who follows hedge funds for the Barclay Group financial advisory firm. "Does that have an impact on price? I would suspect so." Rest at link |
| Posted by:ed |