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Speculators Under Fire Cut Bullish Gasoline Bets: Energy Markets
Perspective | 30 March 2012

Hedge funds cut bullish gasoline bets for a second week as rising prices curbed demand, spurring calls for regulation of energy speculation and putting fuel costs at the center of the US presidential election.

Money managers reduced wagers on higher gasoline prices by 6.4 percent in the seven days ended 20 March, the Commodity Futures Trading Commission’s Commitment of Traders report on 23 March showed. Net-long positions declined to the lowest level since 31 January.

Gasoline demand fell for the first time in six weeks as rising prices led motorists to curb consumption, the Energy Department reported 21 March. Futures have gained 26 percent this year as increasing tension with Iran pushed oil higher and refinery shutdowns triggered concern that stockpiles may be curtailed during the peak US driving season.

“After accumulating such a long position and being very profitable, money managers are thinking it’s not a bad idea to put some money in the bank and reduce some risk,” Kyle Cooper, director of IAF Advisors, a Houston-based consulting firm, said by phone on 23 March. “With all the attention being paid to gasoline prices, if you’re long, you always have a fear that the government might do something.”

Gasoline, the best performer this year in the Standard & Poor’s GSCI index of 24 commodities, reached a 10-month high in the week ended 23 March. Futures for April delivery were little changed 26 March after rising 4.56 US cents, or 1.4 percent, to settle at US$3.3852 a gallon on the New York Mercantile Exchange on 23 March. Prices gained 0.3 percent in the week covered by the report.

Dipping Demand

Demand over the four weeks ended 16 March dropped 7.8 percent from a year earlier, the Energy Department reported 21 March. Year-to-date sales are 5.6 percent below a year ago, MasterCard Inc’s 20 March SpendingPulse report. It is the biggest decline for this time of year in MasterCard records, which go back to 2004.

A wave of refinery closures on the US East Coast has raised the potential for gasoline shortages during the peak April-to-September driving season. The region will have lost almost half of its refining capacity in six months by July, according to data compiled by Bloomberg based on Energy Department statistics.

The pump price for regular gasoline has jumped 19 percent this year to a nationwide average of US$3.894 a gallon, according to Heathrow, Florida-based AAA.

Consumer Sentiment

“With prices this high, we’re starting to see consumer demand fall,” Hamza Khan, an analyst with the Schork Group Inc, a consulting company in Villanova, Pennsylvania, said by phone on 23 March.

“Given that it’s an election season, we’re probably going to see a lot of rhetoric about gasoline prices.”
Senator Richard Blumenthal, a Democrat from Connecticut, said 18 March that he sent a letter to US Attorney General Eric Holder calling for action against “abusive and illegal speculation by market manipulators and foreign cartels”. He asked for action from a task force formed almost a year ago to investigate speculation and fraud in energy markets.

Blumenthal was among six Democratic senators plus Bernie Sanders, a Vermont independent, who introduced a bill on 21 March to force the CFTC to invoke emergency powers “to rein in speculators responsible for rapidly rising gasoline prices,” according to a statement on Sanders’ website.

Romney Versus Obama

Republican presidential candidate Mitt Romney said 18 March that President Barack Obama is responsible for higher costs because his administration has stifled US energy production. “Producing more oil at home isn’t enough by itself to bring gas prices down,” Obama said 22 March during a visit to Cushing, Oklahoma, the delivery point for Nymex oil contracts.

Domestic crude oil production rose 3.6 percent last year to an average 5.7 million barrels a day, the highest level since 2003, according to the Energy Department.

The US is the closest it has been in almost 20 years to achieving energy self-sufficiency because of increased oil and natural gas output, as well as greater efficiency. The proportion of demand met from domestic sources has been rising since 2005, when it hit a low of 70 percent, and increased to 81 percent through the first 11 months of 2011, according to data compiled by Bloomberg and the US Energy Department.

Oil is taking only half as big a bite out of Americans’ pocketbooks as it did in 1981, the last time shipments from Iran were disrupted. The cost of a barrel of crude in the U.S., adjusted for total disposable income, was US$107.92 in January compared with a peak of US$213.44 in the same month in 1981, according to data compiled by Bloomberg and the Energy and Commerce Departments.

Gasoline Wagers

According to CFTC data, bets on rising gasoline prices advanced for 11 weeks through 6 March to the highest level in records dating back to 2006.

“We hit a record that was far and away above anything we have ever seen before,” Andy Lipow, president of Lipow Oil Associates LLC, an energy consulting firm in Houston, said by phone on 23 March.

Money managers, including commodity pools and commodity- trading advisers, cut long positions in gasoline by 5,905, or 6.4 percent, to 86,695, the CFTC data showed.

Open interest in gasoline futures among all large traders, including money managers, producers and commercial users, rose by 2,013 futures and options to 408,012 in the week ended 20 March, the highest in records dating back to 2006, according to the CFTC report.

Other Markets

In other markets, hedge funds and other large speculators increased net-long bets on four natural gas contracts by 3,309 futures equivalents, or 23 percent, to 17,714 in the week ended 20 March. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swaps, Nymex Henry Hub Penultimate Swaps and ICE Henry Hub Swaps. Henry Hub, in Erath, Louisiana, is the delivery point for Nymex futures, a benchmark price for the fuel. Funds lowered bullish oil wagers by 10,579, or 4.1 percent, to 247,827 futures and options in the seven days ended 20 March. Bets that heating oil advanced for a fifth week, rising by 368 futures and options combined, or 0.8 percent, to 47,274, the data showed.


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