KEY POINTS:
The surge in speculative investment in commodities has encouraged wild swings in daily oil prices this year, exaggerating trends and sometimes causing trade that seems to run against fundamental signals.
Open interest in the New York Mercantile Exchange oil contract jumped around 31 per cent this year as
investors piled into the overall commodities rally and other asset classes struggled against the drag of the sub-prime crisis.
The rise of investment from speculators, including hedge funds, has added liquidity to the market but it also has skewed the impact of fundamental news and heightened volatility over the past two months.
"The larger so-called 'speculative' investors loom in commodity markets, the farther away from narrowly defined supply/demand fundamentals one may have to look for daily price drivers," said Antoine Halff in a research note this week.
Daily prices swings have held above the 200-day moving average every day since mid-October - coinciding with a record rally in oil prices to near US$100 ($133.54) a barrel.
That 200-day moving average for daily price swings is now nearly US$2.07, well above the average of US$1.68 last year, shows a Reuters EcoWin calculation. At the end of 2001 when the latest oil boom began, the average daily range was US88c.
One dramatic swing happened in mid-December, when oil prices surged 5 per cent one day on a move by central banks to ease the credit crisis, then slumped the next day, with traders citing economic concerns.
Total open interest on the New York Mercantile Exchange crude contract, meanwhile, has swelled to a record average of nearly 1.4 million positions this year, from an average of just over 1 million positions in 2006, US Commodity Futures Trading Commission data showed.
Experts said the jump helped accentuate fundamentals that sent US oil from below US$50 in January to US$99.29 on November 21.
"Open interest appears to have grown disproportionately relative to either the growth in either demand or supply, so you know that even if there is ultimately some fundamental linkage you are simply further removed from it," said Jan Stuart, global oil economist for UBS Securities LLC.
Speculator influence has been especially noticeable over the past three weeks, analysts said.
Many commercial players and large speculators reduced trading activity in recent weeks and are likely to remain quiet into next year, according to Stephen Schork, president of The Schork Report.
This will spread price control across a larger number of smaller players, contributing to volatility.
"As soon as you get any momentum in one direction, it tends to accelerate at a crazy pace, simply because there is so much weak money that there is not going to be anyone who is going to get stuck in this market," Schork said.
- REUTERS