‘Remove crude from traded commodities on exchanges to see cut in prices’

If crude was eliminated from the commodities traded on Nymex, Srinivasan predicted, the world would ‘see a drastic reduction in the price’. The benchmark price of crude touched $98.10 on Nymex on Wednesday, a new record, before retreating to $96.37.

Srinivasan’s idea is based on a widely held belief that investors are artificially driving up oil prices. Hedge funds, banks and pension funds have poured capital into oil trading in recent years, betting that demand will increase. Analysts say these bets have become self-fulfiling prophecies, helping to push prices higher.

What analysts cannot agree on, is how much of the increase is attributable to the investors — estimates vary from $10 a barrel to over $30 a barrel — and what, if anything, should be done about it.

But voices as varied as those of Mohammad Alipour-Jeddi, the head of market analysis for Organisation of the Petroleum Exporting countries (OPEC), and William F Galvin, the secretary of state in Massachusetts, have blamed speculators for rising prices. “There is enough crude in the markets,” Alipour-Jeddi said on Monday. Bottlenecks in refining and “speculative activities” are forcing prices higher, he said.

Galvin, meanwhile, is asking the US agency — Securities and Exchange Commission (SEC), to investigate what role investors have played in higher prices.

A subcommittee of the US House headed by representative Bart Stupak, Democrat of Michigan, is investigating commodities trading, and one bill before Congress proposes giving Nymex’s regulator, the Commodity Futures Trading Commission, more oversight over Nymex’s rival, the Intercontinental Exchange.

Analysts say the market has gone from a small group of oil users and producers to a full-fledged investment arena in recent years, like stocks or bonds. Prices can move according to intangible factors like fear, just as they do in the equity markets, the analysts say. Investing in oil has also become a hedge against a weak dollar.

“Looking at oil supply and demand doesn’t help me to understand oil prices” any longer, said Roger Diwan, a partner with PFC Energy, a consulting company in Washington. “I need to look at the dollar, at inflation and at credit squeezes.”

India imports 70 per cent of the crude oil and has few strategic reserves. Buying stakes in overseas oil properties is proving much cheaper for the country than purchasing crude on the open market. In some areas, where stakes in oil fields are purchased, it is pulling light crude oil – the kind that sets the benchmark oil price – out of the ground for less than $40 a barrel, Srinivasan said.

But Nymex executives dismiss Srinivasan’s suggestion of halting oil trading. “Nymex is just a central point where buyers and sellers can come to exchange their wares,” Richard Schaeffer, the chairman of Nymex, said in a telephone interview. “We don’t make the prices. We make the prices known.”

Without Nymex, Schaeffer said, users could “only imagine a group of countries getting together and saying ‘What do we charge today?’”

Despite the risks of ever-rising oil prices, analysts say that Srinivasan’s idea is unlikely to be adopted; the oil market has become too big and too powerful. “There is no way to put the genie back into the bottle,” Diwan said.