Among the biggest of oil speculators, US oil funds says it's not the boogie man

News Date: 10/05/2009 Outlet: Associated Press (AP) Contact: Kahn, Chris

By CHRIS KAHN

NEW YORK (AP) - John Hyland's funds control billions of dollars that flow in and out of energy markets, making him one of the biggest oil speculators in the world and also one of the biggest potential targets for federal regulators.

The 50-year-old Californian has been asked to appear before the Commodity Futures Trading Commission on Wednesday, where he will say that he isn't the boogie man everyone's looking for.

There is evidence that he may be right.

"Five years ago, they might have blamed the oil companies," Hyland said. "Now they're blaming us."

For more than a year now, Hyland and other speculators have been in the cross hairs of Congress, regulators and even oil traders, who blame them for $4-a-gallon gas last year.

Hyland's U.S. Oil Fund was founded in the spring of 2006 and it steadily acquired a growing number of oil contracts. Yet that changed when prices began a rapid climb in the summer of 2007, according to documents the company filed with the Securities and Exchange Commission.

The fund started dumping shares fast, according to SEC filings submitted by the company. And when crude prices bottomed out in 2009, the fund tripled its holdings, buying up contracts when oil was hitting multiyear lows.

That, Hyland said, is hardly a sign that index funds like his are driving up prices.

The U.S. Oil Fund allows anyone to participate in energy markets without having to find a place to stash a 42-gallon barrel of oil or other commodities like natural gas. Shares of the fund closely track the daily value of energy commodities on the New York Mercantile Exchange and the fund buys those contracts with money from shares.

What is clear is that since the U.S. Oil Fund was founded, the first such exchange-traded fund of its kind, the volume of trades made on the Nymex has exploded, backed by billions of investor dollars.

However, instead of sending oil prices spiking or tumbling, the funds may actually have an elastic effect on markets, pulling prices up from severe lows and highs, according to an economic study released this week.

Economist Philip K. Verleger Jr., investors in the widely tracked Standard & Poors GSCI index and the Dow Jones-UBS Commodity Indexes don't drive energy prices.

Verleger, who also will address the U.S. Commodity Futures Trading Commission Wednesday, said index traders bought fewer oil contracts when prices spiked last year, and they bought more when prices started to plunge in the fall.

As a result, they may have kept energy prices from skyrocketing even higher last year and plunging even further in January.

"Index funds are the enemy of those who want oil prices to drop over a cliff or spike much higher," he said.

Opinions about the affect of index funds remains sharply divided.

"I'd just get rid of them," said hedge fund manager Michael Masters, a vocal critic of oil speculation who also will address the commission on Wednesday. "They don't really serve much of a purpose. They're not trading on supply and demand."

Many traders back those comments and for months have said the current price of oil cannot be justified by the fundamentals.

But Hyland says it's not realistic to expect energy commodities like oil will behave in a rational way, given the current economic climate.

"We've seen everything we know gyrating like crazy," he said. "Why would oil be any different? Do you really think the price of oil is going to stay flat when the economy seems to be going off the cliff?"

It was volatility that led to the founding of the U.S. Oil Fund in a tiny five-room office at a small San Francisco-area mutual fund called Ameristock.

And the USO has made huge sums of money.

When any investor thinks oil prices are on the way up they can buy a share of the fund, which tracks oil prices. If a USO investor thinks prices are on the way down, they can sell the share, and the USO must eventually sell contracts to account for it.

USO's net asset value increased more than 11-fold from May 2006 to June 2009. USO estimates its current value at $2.25 billion and as of Monday controlled 3 percent of all crude oil traded on Nymex. At one point this year, it controlled closer to 20 percent, leaving little doubt that it can influence prices.

Which has led Hyland this week to Washington.

Although the CFTC, which is holding the third hearing into speculators Wednesday, hasn't been able to quantify the affect of speculators on prices, Commissioner Bart Chilton says where there's smoke, there's fire.

"The circumstantial evidence that they're having some impact is pretty clear," Chilton said.

Hyland said the impact has been exaggerated, pointing to the severe drop off in crude prices when a barrel of oil fell more than $100 dollars between late July and early December last year.

"We were buying the whole way down," Hyland said. "And yet, despite all this buying, it wasn't enough to get the price to go up."

According to company data supplied to the SEC, as prices plunged, the fund quadrupled its oil holdings, the first time it owned more than 30,000 contracts.

This year, as crude prices jumped again from February to June, USO was again mostly selling contracts.

Other speculative investors were acting similarly.

An Associated Press analysis of federal data shows that numerous speculators also were buying into the market as prices plunged.

Many oil traders were critical of that inflow, saying there was no demand for crude and that passive funds were keeping prices artificially high.

The flow of money from such funds encourage oil producers to manipulate energy prices by hoarding crude to sell at a later date when it fetches more money, Masters said.

"Why should Americans pay higher prices so Goldman Sachs can have a passive index product that drives up the price of crude and benefits oil producers?" he said.

The influx of speculators has fundamentally changed the way oil is traded, and people need to understand that, Masters said.

Others say the influx of money may actually have helped prevent a collapse in crude prices that could have led oil companies to cut spending on exploration and production. If the global economy rebounds and production is falling, energy experts say, the summer of 2008 will probably be remembered as a precursor to the real energy crises.

For Hyland, giving more investors exposure to energy markets only makes them more functional.

"Buy low, sell high. That's what you're supposed to do, right?" Hyland said.

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