Monday, July 04, 2011

Speculators unburned

Good point. Open auction is probably a very bad way to prevent speculation. Though not sure what the best way to do it would be.

------ from Google Reader

IT HAS been almost two weeks since the International Energy Agency (IEA) announced it would release 60m barrels of oil from its member governments’ reserves, apparently in response to “ongoing disruption of oil supplies from Libya”. How is that working out?

If the intention was to reduce prices in the medium- or long-term, it has failed. The price of Brent crude fell $5 on the announcement but has rallied since. The price of West Texas Intermediate (mainly produced in America) is trading higher than before the IEA announcement (see chart).

If the intention was to punish speculators, there is also cause for concern. Some speculators who were long oil may have lost big, but only those whose long positions were due for delivery in the few days after June 23rd, when the price was significantly depressed.

In the meantime, the IEA releases have created an opportunity for another potential speculative play. Some IEA members, including Japan and Britain, released their reserves directly to industry. Some even released refined products, such as diesel or jet fuel, which is only of use in specific industrial settings. In contrast America released 30m barrels (half of the IEA total) of unrefined crude, to public auction.

Oil traders are free to bid for it. And it seems they did. The Department for Energy says its auction was heavily oversubscribed with bids from more than 90 parties. For reference, there are 148 refineries in America, but most are owned by a few major players such as Exxon, who would do the actual bidding.

Traders who anticipate the oil price will rise, and have the capacity to store oil, can buy physical stocks now, and sell oil forward. As long as the price rises enough to cover storage costs, they will turn a profit. If a trader was able to purchase West Texas Intermediate—the oil held in America's Strategic Petroleum Reserve (SPR)—at the spot price on June 24th, they would already be sitting on a tidy profit.

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