In the biggest one-day gain ever, the July contract for benchmark US light, sweet crudes shot to a record high of $139.12/bbl in intraday trading June 6 on the New York Mercantile Exchange before closing at a record $134.54/bbl, up a whopping $10.75 for the day.
Nervous traders attributed that jump to a statement by Israel's Transport Minister Shaul Mofaz that Israel will attack if Iran continues a program for developing nuclear weapons. But the crude contract had escalated more than $5/bbl June 5 when Jean-Claude Trichet, president of the European Central Bank, said the bank might raise its interest rates.
Olivier Jakob at Petromatrix, Zug, Switzerland, blamed Trichet for triggering "a $16/bbl rally in slightly more than 24 hr." By setting in motion the biggest 2-day gain ever on NYMEX, Jakob said, "Trichet has managed what no war, no hurricanes, no OPEC [member] has ever managed to do." He said, "Oil fundamentals had recently started to reassert themselves with worries about demand destruction, but Trichet chased them away and re-invited financials to the party. The underlying oil fundamentals are, however, unchanged."
The June 2-6 trading week had started with crude futures in a downward corrective phase "but reversed course violently when Trichet shocked the financial system by pointing to an interest rate hike in July," Jakob said. When the dust cleared, benchmark US crude gained a total of $11.19/bbl for the week. North Sea Brent was up $9.91/bbl overall. Heating oil escalated by $12.90/bbl, and reformulated blend stock for oxygenate blending (RBOB) increased by $8.40/bbl.
When the benchmark crude price was below $125/bbl, Jakob said, "Demand destruction was not evidenced at $80/bbl [or] $100/bbl, but it is now." In May, the front-month crude "traded only a few days above $130/bbl, which means that the breaking point for the subsidized oil economies was before that level" he said.
Malaysia and India joined the list of emerging countries cutting fuel subsidies for their national markets. Subsidy cuts in 2008 represent 9.8 million b/d of oil demand or a third of the world oil demand growth estimated by the International Energy Agency," Jakob said. IEA's forecast of global demand growth in 2008 was "already half what it was at the start of the year, and the trend is to head into one of the lowest [levels of] yearly demand growth of the decade," he said.
High oil prices have triggered a policy shift in the US with lawmakers pressing for a change in futures market regulation. Potential changes by the Commodity Futures Trading Commission can have as much effect on oil prices as any decisions by the Organization of Petroleum Exporting Countries, Jakob said.
US Rep. Bart Stupak (D.-Mich.) claimed some US trading houses have been manipulating energy futures markets, although a government investigation has not uncovered any illegal activity. Investment banks denied those charges. Stupak chairs the subcommittee on oversight and investigations under the House energy committee.
Jakob said Stupak's charge "was purely a public relation exercise to sponsor his antispeculation bill, but the risk from all this agitation from lawmakers is still to push for a CFTC reclassification of 'speculators' as well as a change of policy on limit waivers. Perversely, this might push some pension funds to buy before they are potentially not allowed to do it anymore, and we continue to witness an increase in the California Public Employees' Retirement System's [one of the largest US institutional investors] allocation to inflation assets since the pressure on the CFTC started to develop. Meantime banks buying commodities will state that they are not speculating but simply hedging Trichet."
Earlier, George Soros, a financial speculator, testified before the US Senate Committee on Commerce, Science and Transportation, about the impact of financial "bubbles" on oil markets after first warning senators, "I am not an expert in oil markets." Soros is best known for "breaking the Bank of England" on "Black Wednesday" in 1992 when he sold short some $10 billion in English pounds after the bank failed to raise its interest rates to the level of other European Exchange Rate Mechanism countries or to float its currency. The bank was forced to devalue the pound sterling, and Soros made an estimated $1.1 billion on his transactions.
Paul Horsnell, Barclays Capital Inc., London, said, "Congress must now be close to running out of room to conduct commodity bubble hearings. At the current rate of growth, a quick calculation reveals that by the end of the year, 2 out of 3 Americans will have given congressional testimony about commodities bubbles."
(Online June 9, 2008; author's e-mail: firstname.lastname@example.org)