WASHINGTON (AP) - As oil prices charge past $110 a barrel, analysts say
government-run investment funds from oil-rich nations may be adding speculative
heat to an already red-hot market.
By placing bets in futures markets, these sovereign-wealth funds are no
different than hedge funds, pension funds and other institutional investors,
with one exception: at the same time they profit by trading "paper" barrels,
their governments' oil companies also reap huge sums pumping black gold for
consumers worldwide.
While there is no public data proving that sovereign wealth funds invest in
oil futures contracts, energy analysts say it's likely they're making financial
wagers on oil -- and other commodities -- for the same reasons as other
institutional investors: to take advantage of rising global demand and to
cushion them from the falling dollar.
"They have two places to put their money: stock markets and commodities
markets," said James Cordier, president of optionsellers.com, a trading firm.
"That's an easy choice right now."
The S&P 500 index has fallen approximately 16 percent from its high last
October, while oil futures traded on the New York Mercantile Exchange have
jumped 29 percent since then.
Some analysts estimate that the stampede by investment banks, hedge funds
and other institutional investors into oil futures -- which closed Friday at
$110.21 a barrel -- has lifted the price by as much as $30.
The same dynamic has sent gold to record high prices near $1,000 per ounce.
"You're seeing record prices right now because of non-traditional players
all coming into the market at the same time," said Larry Goldstein, director of
the Energy Policy Research Foundation. "It would be hard to believe that
(sovereign funds) are on the sidelines."
The average daily trading volume in crude-oil contracts on the New York
Mercantile Exchange jumped to more than 480,000 in 2007, compared with roughly
280,000 the year before.
Non-commercial trading -- buying and selling by investors that neither
produce nor consume oil -- has also risen sharply. The proportion of contracts
held by non-commercial traders increased from approximately one-sixth in 2002 to
one-third in 2008, according to Robert Weiner, a professor at George Washington
University.
Sovereign wealth funds may also bet on oil prices indirectly, by providing
capital to hedge funds.
Frank Holmes, chief executive of U.S. Global Investors, a mutual-fund
company, said there are at least 600 energy-related hedge funds and another
200-plus that focus on commodities. Holmes spoke during a World Bank panel
Tuesday on the impact of sovereign and hedge funds on oil prices.
Hedge funds have "raised billions" in Gulf states such as Dubai, Holmes
said, which is part of the United Arab Emirates. The UAE also boasts the largest
sovereign wealth fund in the world, the Abu Dhabi Investment Authority, with an
estimated $875 billion in assets. A U.S. spokesman for Dubai's government funds
declined to comment on whether they invest in oil futures.
Antoine Halff, a commodities analyst for Newedge, the brokerage arm of
Societe Generale, said supply and demand fundamentals don't justify the record
price levels. U.S. oil demand is declining and gasoline inventories are at their
highest levels in 15 years, he said.
Oil and other commodities futures are more attractive as the dollar declines
in value compared to the euro and other currencies. Since oil is priced in
dollars worldwide, its price tends to rise as the dollar sinks. Oil futures
bought and sold in dollars are also more attractive to foreign investors with
stronger currencies.
The high price of oil has produced a flood of revenue for oil producers in
the Middle East and Europe. Morgan Stanley estimated last fall that Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the UAE received approximately $610
billion in oil revenue in 2006, the latest figures available.
Most of the Gulf countries, as well as Norway and Russia, use sovereign
wealth funds to reinvest their proceeds. Asian countries such as China and South
Korea have also set up funds to reinvest their trade surpluses. Analysts
estimate that approximately 40 funds worldwide control about $2.5 trillion in
assets, a total that could reach $12 trillion by 2015.
The funds gained widespread public notice in recent months after pumping
over $30 billion into U.S. and European banks hurt by the mortgage crisis,
including Citigroup Inc., Merrill Lynch & Co. Inc., and Morgan Stanley.
Most of the funds invest in financial instruments, such as stocks and bonds,
but they are also likely to invest in commodities, analysts said, in order to
diversify.
Tom Fearnley, an official at Norway's Ministry of Finance, said during the
World Bank forum that Norway's sovereign fund, the Government Pension
Fund-Global, began investing in commodities in 2006.
Meanwhile, the Persian Gulf countries have an additional reason to hedge
against the dollar's decline by investing in oil futures, according to Kevin
Book, a senior energy analyst at Friedman, Billings, Ramsey & Co. Several Gulf
states, including the UAE and Qatar, peg their currencies to the dollar and have
suffered along with its fall.
While Persian Gulf sovereign funds would be taking a risk since oil prices
could decline, "it isn't the worst investment idea you could have," Book added,
"if you control the oil supply."
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