KEY POINTS:
George Soros, the billionaire financier, has rounded on institutional investors who have ploughed money into oil, saying they are following a "craze" that is inflating a commodities bubble and harming the global economy.
And he predicted that the rise of index funds that allow retail investors to bet
on the oil price could lead to a crash that destabilises more than just the commodities markets.
Soros was called to give evidence on Capitol Hill as US lawmakers investigated whether "speculators" were manipulating or otherwise influencing the price of oil, which has doubled and doubled again in the past five years. A 25 per cent spike since the start of the year has sent petrol above US$4 ($5.1) a gallon in many US states and sent the issue to the top of the political agenda.
Members of the Senate commerce committee sought Soros's views due to his reputation as one of the most successful speculators of his generation.
Last year, he was one of three hedge fund managers to take home more than US$2.8 billion after betting on the mortgage market collapse, and in the UK he has been known since Black Wednesday in 1992 as "the man who broke the Bank of England", winning US$1 billion on bets that the pound would be forced out of the European Exchange Rate Mechanism.
While his views on the oil market were not as apocalyptic as his recent remarks that the US faces its worst economic crisis since the Great Depression, he had little doubt that speculative buying is contributing to the rise in oil prices. Where the oil market was once driven by buyers and sellers of the real-world commodity, oil has since become an asset class into which institutional investors such as pension funds and retail investors can allocate some of their money.
"Both trend-following speculation and institutional commodity-index buying reinforce the upward pressure on prices," he said. "I find commodity-index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987. In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987, there would be a crash."
However, Soros did say that real-world factors were also contributing to the rise in oil prices, which could go higher yet.
Supply has been constrained because it is costly to replace the output from mature oilfields and due to a lack of investment by foreign governments who are cashing in on high oil prices, he said.
Demand is accelerating because emerging-market Governments such as China subsidise energy prices, insulating their populations from rising costs, while energy use in the West will not fall until there is a full-blown recession.
"While focusing on speculative excesses, we should not lose sight of these underlying issues," he said.
Ben Bernanke, the chairman of the Federal Reserve, had earlier declared that the US central bank was "attentive" to the weakness of the dollar, suggesting that it may not allow the currency to depreciate sharply. The weakness of the US dollar is one of the factors that has pushed dollar-denominated oil prices higher.
The Commodity Futures Trading Commission is investigating whether speculative buying is influencing oil prices, and whether outright market manipulation is taking place. Last week, it signed an agreement with the UK's Financial Services Authority to share information about trading on electronic exchanges based in London.
- INDEPENDENT