June 4, 2009 / 3:24 PM / 11 years ago

Masters says signs of oil bubble starting to appear

WASHINGTON (Reuters) - Congress has not done enough to curb excessive speculation in the oil markets, leaving the country vulnerable to another price run-up in 2009, hedge-fund manager Michael Masters said on Thursday.

Appearing before the Senate Agriculture Committee, Masters said oil prices are largely not determined by supply and demand but the trading desks of large Wall Street firms.

“Nothing was actually done by Congress to put an end to the problem of excessive speculation,” said Masters, referring to the jump in oil prices last year. “As a result, there is nothing to prevent another bubble in oil prices in 2009. In fact, signs of another possible bubble are already beginning to appear.”

Oil prices soared to a record $147 a barrel on July 11, before plunging below $33 in December amid a global economic slowdown. But in recent weeks, oil prices have approached $70 a barrel as the economy shows signs of recovering, increasing demand for oil.

“If Congress allows this to continue, then once again oil prices threaten to throw our economy back into a double-dip recession, squashing all of the Obama administration’s attempts to revive our economy,” said Masters.

Gary Gensler, the newly confirmed chairman of the Commodity Futures Trading Commission, told senators that he has directed the CFTC staff to lay out all options available under its current authority to guard against another price run-up.

“I’m concerned that as the good news of an economy rebounds ... that we might see a resurgence of these commodity prices,” he said, noting that financial investors, index funds and others contributed to last year’s asset bubble.

Record prices for everything from cotton, wheat and corn to oil fueled complaints of excess speculation in 2008. Lawmakers, determined to prevent a recurrence, are looking to give the CFTC more funding and authority.

Critics of limiting speculation, which includes traders, academics and others, argue that fewer speculators would mean fewer traders willing to absorb risk. This could make markets less efficient, boost costs for some businesses and lead to higher prices for consumers.

Masters, as managing member of Masters Capital Management LLC, last May gave widely publicized testimony to Congress in which he blamed institutional investors for the commodity “demand shock.”

Masters’ testimony to Congress and another report in September that blamed massive speculation by institutions for the rapid run-up in oil prices received wide play in the financial media. Some players blasted his views as off base, and some said rising oil prices hurt Masters’ investments.

Reporting by Christopher Doering; Editing by Lisa Shumaker

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