American oil trader nets $200 million on futures market

An American commodity trader has netted $200 million for the Swiss trading firm, Vitol, after betting on higher oil prices.
The trader, Andrew Serotta, purchased 40,000 oil futures contracts nine months ago when oil was at $70 a barrel. Calculating prices would go higher, he bought the futures at $80 a barrel. Oil has since risen to $135 a barrel.

So, the question many people are asking is whether the current price of oil is being inflated by rampant speculation? Many theories abound. Some say institutional investors, including pension funds, could be partly to blame. Congress even held hearings the other day to look into this.

Most argue that speculation does account for a small price margin, but nothing like as much as some people think.

The real problem is a tightness in supply and demand due to domestic and geo-political factors, such as limited US oil production, falling production in Mexico and Venezuela, and rebel activity in Nigeria's oil delta.

Here's some rational analysis from Paul Krugman writing in The New York Times: "... the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth."

He adds: "Part of the answer may be the undoubted fact that many people are now investing in oil futures — which feeds suspicion that speculators are running the show, even though there’s no good evidence that prices have gotten out of line."

Some analysts say supply and demand factors have been overtaken by commodities markets being flooded with investment bank money. Investing in crude oil is seen by some as a good hedge against inflation, especially with a falling dollar. On May 20 the Senate Committee on Homeland Security & Governmental Affairs heard testimony at a hearing titled, "Financial Speculation in Commodity Markets: Are Institutional Investors and Hedge Funds Contributing to Food and Energy Price Inflation?"

Click here for more on oil and the hedge funds from Business Week.

Click here to read more about Serotta's oil futures trade.

Click here to read Krugman's op-ed.

- David Adams