Oil surges as investors hunt an 'anti-dollar'


Now why wouldn't that be gold? Is oil's sharp
rise recognition that gold and silver can't
fully hedge inflation as long as their markets
are rigged by central banks?

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By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, April 17, 2008


Oil prices have surged to almost $115 a barrel as China builds up stocks before the Olympics and hedge funds pour money into commodity futures as a way to exploit the collapse of the dollar.

The Opec producers cartel yesterday defied calls from Gordon Brown for a boost in output to help ease the global shortage, sticking to its target of 32 million barrels per day (bpd) for the next three months.

There is some evidence that Opec has actually cut output by 350,000 bpd since the start of the year -- a hostile move in the current climate. It blames the latest spike on "speculators," claiming that world demand will fall 1.4 million bpd to 85.7 million this quarter as the US grapples with recession.

Nobody else can step into the breach. Output is falling in the non-Opec trio of Britain, Norway, and Mexico. Russia's production slipped 1pc in the first quarter. The cost of developing oil fields worldwide has doubled in three years. The cost of operating an oil rig per day has risen from $200,000 to $600,000 since 2003.

"The system is operating flat-out," said Chris Skrebowski, editor of Petroleum Review. "We have been very lucky for the past few years that there has not been any major war or revolution to disrupt supplies. The market is incredibly tight as it is."

Societe Generale said the near $30 spike in prices since early February is largely due to money pouring into commodity index funds, now worth some $200 billion. Crude has taken on a "safe-haven" role for investors fleeing the dollar, or those betting that central banks will let rip with excess liquidity.

"This is now entirely investor-driven," said Dr Frederic Lasserre, the bank's head of commodities research. He added that most of the money is coming from pension funds, insurers, and other long-term investors. They view the US recession as a mere hiccup in a powerful upward cycle, convinced that Chinese and Mid-East demand will hold up long enough for America to recover. "They are all convinced by the fundamental tightness of the market," he said.

Hot money funds are also playing a role, trading oil as a sort of "anti-dollar." Crude is moving in reverse lockstep with the greenback, pushing ever higher (with double or triple leverage) as the dollar reaches fresh lows against the euro. Surging oil prices are in turn stoking inflation, causing investors to bet yet more on oil futures as an inflation hedge. "This has entered a vicious spiral," Dr Lasserre said.

Analysts say it is no coincidence that oil punched higher on the same day that the euro reached a record of $1.5979, up 28 percent in two years. BNP Paribas says central banks should intervene to stabilise the dollar. Every major country now has an interest in slowing the commodity frenzy.

The G7 group of major powers took a step in that direction over the weekend, warning that sharp currency moves had become a threat to financial stability. The markets have dismissed this as empty bluster, prompting a warning from French finance minister Christine Lagarde that speculators may have "misunderstood" what had been agreed.

It is a contentious point whether investors have now caused the price of crude to become unhinged from economic reality. Commodity prices have jumped 47 percent since the credit crunch began in August last year, despite three downgrades in global growth forecasts by the IMF. Oil and metals normally fall hard as growth slows.

The crucial difference this time is that the US, Britain, Germany, Japan, and other rich OECD countries are no longer the driving force in the oil market. The US added just 7 percent of total demand growth from 2004 to 2007, compared to 34 percent for China, 25 percent for the Mid-East, and 17 percent for emerging Asia. The newcomers are oil guzzlers, with a high crude use per unit of GDP created.

Most are still booming. China grew at a blistering 10.6 percent in the first quarter, slightly down from 11.9 percent last year. The country has been raising its oil use by 500,000 bpd a year. Crude imports jumped 25 percent in March, topping 4 million bpd for the first time.

"The OECD doesn't matter much any more," said Mr Skrebowski. "We have an Atlantic-centered view, and we are having trouble getting our heads around the idea that the world has changed."

Of course, China's growth may prove more fragile than it looks. Inflation has reached the danger zone of 8.3 percent. The central bank tightened credit again yesterday. The Shanghai bourse has lost almost half its value since peaking last autumn. Nariman Behravesh, chief economist at Global Insight, warns that China faces post-Olympics "crunch" as the colossal bad debts of the state banking system exact their toll.

Whatever happens, oil cannot easily fall below $70. That is the break-even cost for biofuels, the new oil substitute. Short of a global depression it is hard to imagine what could depress oil prices for long as the rising nations of Asia embrace the affluent society.

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