Speculation continues to dictate oil price movement

Since August, oil prices have been steadily falling after reaching peak prices in June and July. The monthly spot price of the benchmark Dubai crude fell to $112.86 per barrel in August and drastically further went down to an average of $96.49 from September 1-26. It peaked at a July average of $131.27 per barrel after starting off the year at $87.37 in January. Meanwhile, the Mean of Platts Singapore (MOPS) spot price of unleaded gasoline averaged $107.41 per barrel from September 1-26 from $115.49 in August and $140.30 in July. The MOPS spot price of diesel also fell to $121.07 per barrel in September, down from $135.26 last month and its peak price of $169.36 in June. (See Chart)

Consequently, local pump prices have posted nine rounds of reductions since August to the tune of P10.50 per liter for gasoline products and P8.50 for diesel and kerosene. The rollbacks have brought down the pump price of gasoline products to around P49.51 (regular) to P53.91 (premium plus) a liter, as of September 26, and those of diesel to P51.19 and kerosene to P53.77 a liter. The monthly average of local pump prices peaked in July (for gasoline products) and August (for diesel and kerosene) after progressively climbing since February, with prices posting weekly increases from the last week of April to the last week of July. (See Table)

Pump prices of selected petroleum products, monthly average 2008 (in P per liter)
Month

Premium plus

Premium

Unleaded

Regular

Kerosene

Diesel

January

46.15

45.08

44.45

41.76

39.99

38.45

February

45.75

44.66

44.04

41.35

39.61

37.03

March

47.03

45.95

45.33

42.63

40.90

38.31

April

48.99

47.91

47.29

44.59

42.86

40.28

May

52.10

51.01

50.39

47.70

45.85

43.27

June

57.86

56.77

56.16

53.46

51.72

49.14

July

61.74

60.66

60.04

57.34

58.45

55.99

August

58.98

57.90

57.28

54.58

58.73

56.15

Sep 1-12 ave.

55.91

54.82

54.21

51.51

55.77

53.19

Sep latest*

53.91

52.82

52.21

49.51

53.77

51.19

*As of September 26; Bayan estimates (deducting P2, total rollbacks on Sep 18-19 & 26, from the Sep 1-12 averages of gasoline products, kerosene and diesel)Compiled by IBON using DOE data

Some analysts have identified the “combination of the slowdown in the global economy, which is damping oil demand, and higher production from the Organization of Petroleum Exporting Countries (OPEC)” as the major reason for the reductions in world oil prices since July. OPEC, for its part, listed “lower demand especially in the developed countries, increased oil supply, the strengthening of the US dollar and easing of geopolitical tensions” as the factors behind the decline in global prices. [1]

But an independent report released recently by the US Senate pointed to speculators as responsible behind the rapid rise and subsequent steep fall in oil prices this year. The report said that from January to May, index traders poured $60 billion into commodity markets causing a big spike in oil prices. But when the US Congress held hearings in May to July to curb speculation, traders pulled $39 billion from the market. One of the authors of the report summed up their findings, to wit: “The bottom line here is with regard to commodities, money going in pushes prices up, money going out pushes prices down”. [2]

This underscores the fundamental defect of Republic Act (RA) 8479 or the Oil Deregulation Law (ODL). Because the downstream oil industry is deregulated, local firms are allowed to automatically adjust pump prices as supposedly determined by “free market” forces. But the global oil market has always been under the control of a few giant transnational oil corporations from the US and Europe which impose monopoly prices. This has been aggravated by massive speculation in recent years that has further artificially pushed up prices and because of ODL, all these are easily passed on to end consumers. An energy and financial markets expert estimated in May 2008 that “as much as 60% of today’s crude oil price is pure speculation driven by large trader banks and hedge funds”. [3]

Indeed, the global oil market remains vulnerable to speculation and as such local pump prices could again steeply climb in the coming months primarily due to renewed speculative attacks. The volatile financial market, which in one week saw the demise of two of the US’s mightiest investment banks – Lehman Brothers (which went bankrupt) and Merrill Lynch (which sold out to the Bank of America) and could have claimed a third one, the AIG, if not for the bailout by the US Federal Reserve – triggered fresh rounds of speculation. Trading of crude oil futures contracts at the New York Mercantile Exchange (NYMEX) for October delivery jumped at one point by $25 per barrel on September 22 – its biggest single-day surge ever – one week after the upheaval at Wall Street. The unusual price hike compelled the Commodity Futures Trading Commission (CFTC) to subpoena trading records from some NYMEX traders to look into possible “illegal manipulation” of prices. [4]

Speculators are currently betting on a weaker oil demand from the US, the world’s largest oil consumer, following the Wall Street turmoil in September and uncertainties on the Bush administration’s $700-billion bailout plan. NYMEX crude oil for November delivery fell to $106.70 per barrel on September 26 while London Brent crude declined to $103.47. [5]

With the bursting of the housing bubble, more speculators are expected to shift from real estate speculation to speculation in the futures market on commodities including oil. The expected slowdown in real demand as a result of the worsening US recession may not deter traders from speculating on oil since the backdrop for continuing speculation on supply such as the political instability in the Middle East remains.

Sources:

1. “Surprise OPEC cut pushes oil above $100” by Carlos Hoyos, Financial Times, September 10, 2008

2. “Big oil price swings caused by speculators, says report”, Reuters, Inquirer Money, September 11, 2008

3. “Perhaps 60% of today’s oil price is pure speculation” by F. William Engdahl, FSO Editorials, May 2, 2008

4. “Investigation widens into unusual oil price rise” by Diana B. Henriques, The New York Times, September 24, 2008

5. “Oil falls below $107 on doubts over US rescue plan” by Fayen Wong, Reuters, Inquirer Money, September 26, 2008

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