OPEC left to its own devices-Commentary: Hedge fund redemptions lay bare the role in oil speculation

MarketWatch ^ | Oct. 17, 2008 | MarketWatch

[Ernest_at_the_Beach]

he following First Take is real-time analysis and opinion by the MarketWatch commentary team.

SAN FRANCISCO (MarketWatch) -- The Organization of Petroleum Exporting Nations has called an emergency meeting for Oct. 24 aimed at halting a precipitous drop in oil prices.

Crude, despite an uptick Friday, has crumbled to $72 a barrel, half the price it fetched in July. See Futures Movers.

Funny how fast things can change.

Gone is the steady drone of peak-oil forecasts. Gone is the fear that we are in the pockets of "folks that don't like us very much." Prices are down at the pump, and talk radio has moved on, feasting now on banks, bailouts and rampant greed and corruption on Wall Street.

As the industrial world withdraws into a recessionary shell, it takes oil demand with it. China and India's insatiable thirst for oil looks meager now as factory output slows to a trickle.

But there's also been a rush of roving capital out of the market. According to the latest data from Hedge Fund Research, third-quarter hedge fund redemptions hit a record-high $210 billion, spearheading an exodus wealth that burst one of the biggest commodities bubbles of all time. See full story.

It's no coincidence that oil prices plunged in tandem with these record withdrawals, exposing for all to see just how much of the summer's oil-price spike was driven by speculators.

While oil's deep "correction" alarms Big Oil, it's even more alarming to producing nations whose economies are entirely grounded in petro-dollars.

[Ernest_at_the_Beach]

The extreme pain caused by this sudden revenue loss can be gauged by OPEC's decision to move up their next meeting from November to October,.......

[Ernest_at_the_Beach]

fyi

[Boiling Pots]

Paulson said that hedge funds wouldn’t be getting any bailout money “now.”

He’s just setting us up to bail out another group of wealthy folks who risked their money and lost.

What a great country this is.

[seastay]

“Gone is the fear that we are in the pockets of folks that don’t like us very much. “

As if there is something wrong with such a concern? The audacity of these people, the most important thing to them is that we have a touchy feelings for dictators? The stupidity is also amazing,,, of course if we drill for our own oil, it can only lower the prices and make us independent at the same time,,, as if they think there is something wrong with this?

[Ernest_at_the_Beach]

More on Hedge Funds:

Forced hedge fund selling crushes some stocks
Hedge favorites Anheuser-Busch, Freeport-McMoran, CSX knocked off kilter

**************************EXCERPT**************************

But hedge fund investors have been asking for their money back in recent weeks. That's forced some managers to unwind positions to raise cash for redemptions at the end of this year. See story on redemptions.

Investors redeemed about $43 billion from hedge funds in September and more withdrawals are expected through the rest of 2008, TrimTabs Investment Research, which tracks flows of investor money, said on Thursday.

A Goldman Sachs index of 50 stocks that are most heavily owned by hedge funds slumped 19% in September, while the Standard & Poor's 500 index dropped 9%. Another Goldman index, which monitors stocks that don't have many hedge fund investors, fell just 2% last month.

"Forced selling to cover redemptions and delevering by hedge funds has put downward pressure on selected stocks," David Kostin and his colleagues at Goldman wrote in a note to clients earlier this month.

"We expect hedge fund selling/deleveraging to continue," they added, while telling investors to bet against stocks heavily held by hedge funds and to buy stocks with the fewest hedge funds as shareholders.

[Horusra]

Why all the pants wetting when crude drops to 70$? Weren’t the “oil producing nations” doing well at 40$ a barrel a few years ago? I wonder why they would be hurting at prices nearly double what crude was selling at for a long time?

[sarasota]

I got that right away as well. That sentiment is not “gone” nor should it ever be. This guy is obviously voting for Obama.

[Brian S. Fitzgerald]

It’s going to be an interesting meeting.

[Hazwaste]

It's no coincidence that oil prices plunged in tandem with these record withdrawals, exposing for all to see just how much of the summer's oil-price spike was driven by speculators.

Along with that whole gas and crude inventories vs. demand thingy.

[PapaBear3625]

Why all the pants wetting when crude drops to 70$? Weren’t the “oil producing nations” doing well at 40$ a barrel a few years ago? I wonder why they would be hurting at prices nearly double what crude was selling at for a long time?

I'm guessing that people made spending plans on the assumption that oil would stay high. Now, all of a sudden, their budgets need revision, downward. People they made commitments to will not be happy.

[patton]

Does this sound off? The money was in real estate, then it was in oil speculation - where is it now, and where is it going?

[wolfcreek]

Countries like Russia and Iran need to make a certain amount per barrel to break even. It’s more like $90.

[Jack Black]

What value to the larger economy does rampant speculation in commodities provide? Isn’t this just another part of the economic system that is broken, part of the conversion from true investment to casino-on-Wall-Strett operations.

[nickcarraway]

Oil producing nations shouldn’t want oil to be over $40/b. Saudi Arabia had a rule to try to keep it below $30/b, until it started shooting up last year.

[Horusra]

Thank you for the reply. That makes sense.

[Horusra]

Is that because of production costs, transportation costs or grade of oil? Were they not making money at 40$ or is this new production? I want to understand more about this type of stuff. Thanks in advance and thanks for the response.

[Califreak]

I would imagine that with inflation, jihad costs are skyrocketing.

[wolfcreek]

I’m not really sure why. I just heard about this *must have price* a week ago.

[wolfcreek]

I agree. It’s damn sure not something to model your business after.

[rb22982]

It was over $60 a barrel almost 3 years ago. It didn’t shoot up just last year.