By John Kemp
LONDON Feb 27 Soaring oil prices and the
loss of exports from South Sudan, Syria and Iran pose awkward
questions for investors and policymakers.
Last year, a similar surge following the outbreak of the
Libyan civil war eventually resulted in the flash crash on May 5
and the decision to release emergency stocks by the United
States and other members of the International Energy Agency
(IEA) on June 23.
Investors and policymakers are being pressed to explain why
the outcome this time will be different.
The problem is that the circumstances are nearly identical.
The IEA is struggling to explain why it made sense to
release stocks following the Libyan outage but does not make
sense to release them following the loss of production from
South Sudan, Yemen and Syria, and the tightening stranglehold on
Investors cannot explain why the market will be better
supported in 2012, following a rally which has left almost all
hedge funds with large long positions, when last year's nearly
identical rally set the market up for the largest one-day price
drop on record.
Two charts neatly encapsulate the problem.
Chart 1 shows the ratio of long to short positions run by
hedge funds and other money managers in futures and options
linked to U.S. crude oil (WTI). Following the
Libyan disruption, the long/short ratio surged from 4:1 to peak
at 10:1 on the eve of the flash crash. Following problems in
South Sudan, Syria and Iran the long/short ratio has also soared
from 4:1 to 9:1.
Chart 2 shows timespreads in the Brent crude market
for the crucial summer months, when refinery demand is at its
highest as refiners go flat out to meet summer driving demand in
the United States. The IEA cited Brent spreads as a sign of
mounting tightness in the physical market last year to explain
why it decided to release emergency stocks. Supply disruptions
and the Iranian embargo have had an almost identical impact in
Some observers have suggested a stock release would not be
justified in 2012 because unlike last year there has not
actually been a significant disruption in supplies. The IEA
should wait until tanker traffic is actually halted or
threatened through the Strait of Hormuz, they argue, before
providing additional barrels to the market.
But this argument ignores the losses of oil from South
Sudan, Syria and Yemen, and Iran's growing difficult in finding
buyers for its crude, which appears to have cut the country's
exports by several hundred thousand barrels per day. The
tightening timespreads for Brent imply those losses are just as
real as in 2011. If the release of 60 million barrels was
justified last year, it would seem to be justified again in
Investors also face the awkward reality that the oil rally
looks just as stretched as it did last year. WTI prices rose $30
per barrel (35 percent) between the outbreak of fighting in
Libya and the flash crash. But they have now risen $33 (44
percent) since their recent low last October as outages and
tensions surrounding Iran mount.
On the brink of the crash, hedge funds and money managers
had amassed long futures and options positions amounting to 400
million barrels of crude (and short positions amounting to just
38 million), helping push front-month WTI prices to $114. Last
week, hedge funds had amassed 326 million long positions, and 36
million shorts, according to the U.S. Commodity Futures Trading
Commission (CFTC), helping take WTI prices to almost $110.
The inconvenient truth for hedge funds and policymakers is
that the situation in 2012 is an almost exact re-run of 2011 --
which suggests the outcome might be the same.
The main difference is even more awkward for policymakers.
In 2011, the disruption of supplies was caused by an external
shock from Libya. In 2012, it has been caused by a combination
of external shocks (South Sudan, Yemen, possibly Syria) and a
self-inflicted wound caused by sanctions imposed on Iran's oil
sales by the EU and the United States.
"The problem is that the oil price spike we're seeing is
being driven by foreign policy, not the fundamentals of supply
and demand," said a UK energy official, reported in the
Financial Times ("Obama pressed to open emergency oil stocks"
Policymakers are reluctant to admit there is a serious
shortage of crude and order a stock release because it would
mean admitting they badly miscalculated the impact of sanctions.