London, 13 September Supply bottlenecks are being blamed for driving oil prices to record highs, but a more compelling reason may be that investors with a longer view are piling into oil as a one-way bet.
Oil has climbed to a new record above $80 a barrel even though OPEC has just agreed to increase production and there are growing fears that top oil consumer the US could slip into recession, dampening demand.
But investors see a bullish long-term supply/demand picture for oil even if there is a US slowdown and this is helping to fuel the price spiral.
“So the fundamentals are positive. That starts the trend and the speculators, the non-commercials get on the bandwagon,” said Robin Batchelor, who manages around $11 billion in two energy funds at global asset manager BlackRock.
He said the move was being magnified by speculators, but the fundamentals had to be there before speculators got involved.
Speculative long positions on the New York Mercantile Exchange, where U.S. crude oil futures trade, doubled in the week to September 4, an illustration of crude oil’s speculative attractions.
“If you’ve got a one or two- to three-year time horizon I think oil is the nearest thing to a one-way bet,” said Mark Mathias, chief executive of commodity fund manager Dawnay Day Quantum.
“I just think the fundamentals are very solid,” he said. “I still see that $100 a barrel, whether it’s three or five years from now...is on the cards.”
“As a long-term investor you would be saying: ‘I should definitely buy this stuff.´”
Robust demand from emerging economies such as China, India and Middle Eastern nations are key ingredients in oil’s bullish outlook.
And the United States’ appetite for oil is set to hold up even if its economy slows down as demand for oil has become relatively price inelastic.
“Even in the USA, oil demand has held up,” said Jeffrey Currie, head of commodity research at Goldman Sachs. “The probability of seeing prices spike towards $95 a barrel has increased significantly.”
Currie added that modest demand growth, even in the face of high prices, plus the absence of any significant supply increases has eaten into oil inventories, creating backwardation in the oil forward price curve.
Backwardation, a term used to describe a market structure where prices nearby are higher than those further forward, is a bullish signal for traders and investors.
Backwardation is particularly attractive for investors in commodity indexes which get higher returns in a market with this structure.
“Most large financial institutions have gone long on crude, and each new high tested equates to substantial profits. There is an element of a self-fulfilling prophecy at work on crude markets today,” said Global Insight analyst Simon Wardell.
Bullish technical signals have also played a part.
“Our belief is that recent oil price moves are largely technical in nature, drive by rising non-commercial speculator long positions on the NYMEX,” Citigroup said in a research note.
Commodity markets are still heavily influenced by traders and hedge funds that base their buying and selling on computer-driven momentum models.
“The models are all saying momentum is up and the moving averages are heading upwards,” Mathias said.