CERAWeek: Fundamentals or speculation?

Is the influx of institutional investors (i.e. the folks who run your 401(k) plan or state pension funds) into commodities behind the price run-ups we’ve seen in recent years? Or is it all about growth in China and India? Panelists tried to get at that issue here at CERAWeek in a session called “Riding the Curve: the Changing Role of Institutional Investors in Global Oil Markets.”
“Speculators” is an overused term, argues Andrew Safran, vice chairman of global investment banking for Citigroup, since much of the interest in oil markets has to do with putting money in assets that are not correlated with the major stock market indexes.
“They’re not speculators, they’re making alternative investments,” Safran said.
He has no doubt the involvement of these investors amplifies the volatility of oil (and other energy commodity) movements, but all those investors are not necessarily long – betting that prices will go up.
The emergence of banks as major players in energy markets has led to the introduction of complex financial products that companies or investors can use to manage risks related to energy. But those products often create relationships for companies and their energy assets that people don’t fully understand, said Gordon Goodman, trading control officer for Occidental Energy Markets.
The trading relationships in the past between companies and their assets were more straight forward, Goodman said. For example when doing transactions with banks companies like Occidental don’t necessarily want to hold collateral as part of the transaction.

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