Saturday, May 24, 2008

Barron's on Oil

He is not, in case you wondered, the disinterested party mentioned above. That designation, by his own vouching, belongs to a fellow named Michael Masters, proprietor of a hedge fund unsurprisingly called Masters Capital Management, who testified last week before a Senate subcommittee. The burden of his presentation was that such deep-pocket investors as corporate and government pension funds, sovereign wealth funds, university endowments and kindred institutions are in no small measure responsible for the spectacular run-ups in commodities, particularly food and, of course, oil.

He dubs this motley group "index speculators," and he feels quite strongly that Congress should act pronto to curb their pernicious practices. He offers a kind of tutorial on commodities speculation, replete with graphs and charts and other quasi-scholarly trappings.

Mr. Masters seems well versed in the fine points of commodities trading, and he's passionate in his belief that the major stimulus for the fiery gains in oil and food are those big-bucks players. His testimony created a bit of a buzz in the Street, and it's certainly worth a read. That speculators -- especially in the past five or six months, when their normal haunts, the equity markets, were frequently in the dumps -- have been active in the futures arena is no secret. Ironically, we recall a similar plaint -- but in reverse -- made to us by a prominent Texas oil guy who beefed bitterly that speculators were behind the then sharply depressed price of oil.

We suspect that Mr. Masters gives rather short shrift to the impact of both exponential growth of demand not only from China but from India and other emerging countries on the price of oil, and reasonable and growing concern about prospective supply. For all his worthy effort, we found his case not entirely persuasive and, at best, as the old Scotch verdict has it, not proved.

Barron's missed a point. Masters was talking about index buyers and institutional indexers who don't sell. In the last paragraph above, Barron's says: We suspect that Mr. Masters gives rather short shrift to the impact of both exponential growth of demand not only from China..

They missed his point entirely, or Barron's was being disengenious. Mike Masters had a rather extensive testimony before Congress. Here it is:

What he actually said was this:
In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, Index Speculators demand for petroleum futures has increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!

I suspect that Barron's really didn't read Master's testimony!

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