By Matthew Robinson - Analysis
NEW YORK (Reuters) - Oil producers and consumers could force out some of the speculators blamed for sending energy prices to record highs by taking steps such as boosting supply, deepening discounts, and strengthening regulation.
Rising flows of cash from new investors seeking to hedge against the falling dollar and inflation have pushed oil prices near $140 a barrel -- beyond levels justified by supply and demand, according to some experts.
Analysts say moves by OPEC kingpin Saudi Arabia to hike output ahead of a meeting of oil producing and consuming nations on June 22 could help burst the speculative “bubble” -- if the oil is priced low enough for refiners to begin rebuilding inventories.
“The key is the price at which they sell; they need to discount it and make it attractive,” said Sarah Emerson of Energy Security Analysis Inc (ESAI). “I don’t think that the issue is volume, I think it is price.”
Building consumer inventories could send a clear signal to investors that fundamentals cannot support the 40 percent rise in prices this year. Prices have jumped more than six-fold since 2002 amid skyrocketing demand from emerging economies like China and India.
But some analysts say much of the rally this year has been driven more by a fresh wave of cash from investors such as pension funds, who buy into simple long-only commodities indexes to hedge against inflation and the weak dollar.
These indexes have come under pressure from U.S. regulators catching heat from Congress over rising oil prices, and the U.S. Commodity Futures Trading Commission and its U.K. counterpart reached a deal to impose position limits for U.S. crude on the ICE Futures Europe exchange.
“Position limits would probably go toward curbing investor enthusiasm,” said Antoine Halff, deputy head of research for Newedge USA.
Increasing the cost of margin calls, proposed by some experts, could also send some investors out of oil.
“Institutional investors seem ever more closer to being placed in the regulatory crosshairs,” said Barclays Capital in a research note.
Some experts blame the lack of transparency throughout the entire energy sector for confusion over what some call the speculative “bubble” behind recent price spikes.
OPEC members have repeatedly said that markets are well-supplied, blaming speculators for oil’s rise, while others such as U.S. Energy Secretary Sam Bodman say record oil prices are justified by tight supplies and rising demand.
A highly visible move by producers to put oil into storage near key markets could bring some calm.
“You can certainly do it through floating storage and make it visible to people. You can lease storage that other people have not leased,” said Edward Morse, chief energy economist at Lehman Brothers.
“I think there are places to do it. You can do it on either side of the Med, ARA (Amsterdam-Rotterdam-Antwerp), you can do it by buying or renting facilities in the Gulf Coast and all over the Far East.”
High oil costs, as well as limited access to credit, have helped prevent refiners from building up inventories in the world’s top consumer. U.S. inventories have dropped below the five-year average, fueling concerns of a supply shortfall in the giant market and drawing in more investors.
Still, some analysts defend the rising flows of investors and argue that increased regulation could prove detrimental to the market longer-term.
“Governments would be better off trying to address the issue of the current imbalance in supply and demand,” said Richard Cliff, a partner at Eversheds law firm in London.
Additional reporting by Barbara Lewis in London, editing by Matthew Lewis