If there is one thing that the history of commodity markets tells us it is that if producers can support and manipulate prices in their favour, then they will. As those who have read my previous two Naked Capitalism posts (here and here) will know, my analysis of the oil market in recent years is that investment banks have enabled oil producers to create not just one but two bubbles in the oil price. The first – a private sector bubble – was from 2005 to July 2008, and then – after a collapse in price from $147/barrel to $35.00/barrel in November 2008 – a public sector bubble was inflated in the first half of 2009 which remains to this day.
I firstly outlined how passive ‘inflation hedger’ investors in Exchange Traded Funds and Index Funds essentially lent dollars to oil producers, and were able to borrow oil in return. In doing so, they not only perversely caused the very inflation they aim to avoid, but also eroded the foundations of the crude oil derivative markets as a risk management mechanism.
Secondly, I explained how much of this flow of medium and long term risk averse investment which has financialized the oil market has used the very same Prepay technique which Enron used to defraud investors and creditors. By creating what is essentially Paper Oil the investment banks who come between the funds and the producers have been able to inflate and distort the market price of physical oil, and hence the derivative contracts based upon that price.
Note here that my view of the oil market in the long term is that the price of a finite resource can only go up.
Spikes and Speculation
I have mentioned already the role in inflating these oil price bubbles of passive and risk averse investors who aim to avoid loss and thereby to ‘hedge inflation’. But these risk averse investors are diametrically opposite in motive from the active risk-taking investors...
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