Big oil price swings caused by speculators: report

By Ayesha Rascoe

WASHINGTON (Reuters) - Institutional investors caused the rapid rise and subsequent steep fall in oil prices in 2008, according to an independent report released by U.S. lawmakers on Wednesday.

The report, co-authored by hedge fund manager Michael Masters, said from January to May index traders poured $60 billion into commodity markets, causing a big spike in oil prices. When Congress held hearings in May to July about reining in speculation, traders pulled $39 billion from the market, the report stated.

Oil hit a record $147 a barrel in July, and then started falling sharply until it reached $102 this week.

"The bottom line here is that with regard to commodities, money going in pushes prices up, money going out pushes prices down," Masters said.

Portfolio manager for Masters Capital Management, Masters based his analysis on data available to the public from the Commodity Futures Trading Commission, the Energy Information Administration and other investment sources.

Masters said his company paid for the report to help lawmakers as they consider new regulations for futures markets. But critics say Masters' hedge fund invests in industries that would benefit from lower oil prices.

The conclusion of the study is not surprising as it echoes Masters' remarks at several congressional hearings this year about the impact of speculators in futures markets.

The influx of large index traders in the commodities markets has been blamed by some for pushing up oil and food prices. Masters said institutional investors should be banned from all futures markets or be greatly restricted.

"They don't add anything in terms of price discovery, and I think they greatly distort the marketplace," Masters said.

Lawmakers unveiled his report on Capitol Hill to bolster their efforts to rein in what they believe is excessive speculation in oil markets.

Democratic Senators Byron Dorgan and Maria Cantwell said the report showed that U.S. regulators need to "crack down on irresponsible oil speculators."

The Commodity Futures Trading Commission is scheduled to send a report to Congress in the next few days on the role speculators have played in the oil market.

Walter Lukken, chairman of the CFTC, is set to testify before the House of Representatives on Thursday about speculation and the futures market. The agency's report is likely to be discussed.

In the past, the CFTC has downplayed the impact of speculators and said supply and demand factors are the primary driver of oil prices.

Critics say Masters' report overlooks other issues that could influence the price of oil.