Colin Barr

Following the money in banking, economics, and Washington

Speculators double down on oil

March 7, 2011: 6:33 AM ET

Ready for higher oil prices? Wall Street is.

Big traders are betting the ranch that oil prices will keep rising, testing the pain threshold of an economy that is not exactly setting records as is.

Gushing

Large noncommercial speculators – firms that play the futures markets without taking delivery – added to their long position in West Texas Intermediate crude by 50,200 contracts last week, according to Commodity Futures Trading Commission data.

The surge of speculative money into the oil futures pits shows that big financial players are expecting the price of WTI crude to surge well above the recent $105 or so seen last week. If they are right, it will bring $4 gasoline a step closer.

That will not be good news for most consumers, though it could help some big energy traders score  big paydays, thank goodness. You would hate to see the talent fail to get its due.

"It does not get any clearer which way Wall Street is trying to take oil," says Stephen Schork, who writes the Schork Report energy markets newsletter in Villanova, Pa.

Schork notes that speculators now own nearly six times as many barrels of oil – 268,622 futures contracts representing nearly 269 million barrels – as can be stored at the WTI trading hub in Cushing, Okla. And since the CFTC numbers released Friday only go through last Tuesday, they likely underestimate the degree of speculative fervor building in the energy markets.

Olivier Jakob, who covers energy markets for Petromatrix in Zug, Switzerland, estimates that traders added 40,000 to 50,000 crude contracts to their long positions in the second half of last week. That would take them up to seven times the Cushing capacity, a level he calls "extraordinary."

The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it.

All this seems to point to a further rise in oil prices, which will only add to the squeeze on consumers' wallets. If oil and other commodity prices continue skyward, it is only a matter of time till the economy cries uncle, it stands to reason. $4 gasoline this spring could spell slowdown in the fall or winter, Goldman Sachs economists say.

"Our analysis shows the maximum impact of oil on growth occurring with a lag of 3-4 quarters, which would point to a peak impact in late 2011," Goldman's Jan Hatzius wrote in a note to clients Friday.

This is not the ideal time for a big impact from higher oil prices, what with the United States banking on a growth spurt to get out from under a massive debt burden.

That said, Jakob notes that prices could also fall, believe it or not -- with equally interesting ramifications.

A huge level of speculative interest "is fine as long as fighting intensifies in Libya or protests continue in Bahrain," Jakob writes, "but on any signs of conflict resolution there will be historic level of speculative investments that will need to be unwound."

Sounds messy. But maybe then we can talk about $2 gasoline, at least for a while.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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