Speculators seen fueling runaway crude oil prices

Hirohisa Sakamoto Yomiuri Shimbun Correspondent

NEW YORK -- Even though the Organization of Petroleum Exporting Countries announced an 800,000 barrel-a-day increase in crude oil output earlier this month, oil prices have continued to climb on the New York market's West Texas Intermediate (WTI) index.

The oil price at one stage Monday reached 37 dollars per barrel, marking a 10-year high since October 1990--immediately before the Gulf War.

The rising cost of the commodity, possibly due to oil market speculation, has sparked fears of an impact on the Japanese and global economies.

In the U.S. petroleum industry, there is speculation that the price will gradually decrease after November, when the OPEC output increase actually starts to have some effect on stocks. But this line of thinking has so far not built enough momentum to ease fears of a shortage.

The main cause of the price jump to a 10-year high was escalating tensions between Iraq and Kuwait.

On Friday, on the heels of the Sept. 10 OPEC announcement, Iraq warned it would take appropriate measures against Kuwait for allegedly stealing its oil.

Iraqi President Saddam Hussein said Monday that OPEC should not yield to pressure from industrialized nations to increase output.

The Iraqi saber-rattling--a flashback to its 1990 invasion of Kuwait--caused speculation that Iraq's oil output could be suspended. This sparked heightened speculative activity in the oil futures market, thereby accelerating the price increase of the commodity.

The WTI index of the New York Mercantile Exchange, the world's largest crude oil futures market, sees a daily average of 150 million barrels of oil traded, about twice the daily crude consumption of the entire world.

According to a market source, speculators outside the oil industry, such as hedge funds and financial institutions that profit on margins, currently account for more than 30 percent of oil futures trade, inflating it far beyond volumes representative of true demand.

Due to the speculation, the WTI index rose by 45 percent from its value early this year, or about 2.4 times its closing value of two years ago.

An analyst of the U.S. research institute Oil Price Information Service said 28-30 dollars per barrel would be reasonable in view of the current tight demand-supply situation and taking into account past price volatility.

The price shooting above 35 dollars, he said, could only be explained by speculation.

Healthy economies a factor Greater demand for oil also could be a long-term cause of the rising price. The world economy turning upward is stimulating demand for oil and driving up the price, most notably in the United States. The boom that has not before been witnessed in the United States has depleted crude stocks to their lowest level in 24 years.

This relation between oil demand and economic health can be seen in world demand for crude increasing by 1.5 percent year-on-year in the April-June period. Asia, which has now recovered from currency crisis, has seen a year-on-year rise in demand of 4 percent.

Oil producing nations are said to have limited capacity to boost oil supply because they held back from investing in infrastructure and development around 1998, when oil prices were stagnant. This has also been pointed to as a possible contributing factor in the price upswing.

U.S. financial capital markets also have been affected, as has been witnessed in recent huge devaluations of stocks and bonds.

A view persists that prices will rise to around the 40 dollars-a-barrel level even if OPEC decides in November to increase output again, because such action would come too late for a surge in demand during the Northern Hemisphere winter

-- Martin Thompson (mthom1927@aol.com), September 20, 2000