The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding
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OIL PRICES is basically being used almost all of the time. The differential between how much storage is available and how much is being built at any one time is very tiny compared to what is being used. And building additional storage and storing oil is something you cannot do in 3 seconds flat. And from an investment standpoint, the fact that it’s a very good business right now does not mean it’s going to be a good business three years from now or five years from now.” Further, outside of the Western world it is difficult to track what has been happening with storage. Anecdotally there are indications that physical product has been put in storage, in some cases floating in tankers. And storage does not have to take place above ground. “You can leave inventories in the ground,” said Masters. “And one of the things you have gotten because of that is the state of almost permanent contango in many of these markets. In my mind that’s indicative of the large pools of money that have used crude oil as an asset class. They’re never going to take delivery. You can do a swap with somebody with inventory in the ground and you would never see those inventories because the pension funds never take delivery. They are prohibited by contract from taking delivery and in cash and carry that’s exactly what people do.” Another argument is that “for every buyer there is a seller” and that the process is a zero-sum game. That, too, tends to be more academic than reality. “They’re right, for every buyer there is a seller, but you have to find them,” said Dicker. “Because, overwhelmingly, the people who are entering the market want to buy. So how do you scare up sellers; how do you find them? There is only one way to get sellers to sell something that they don’t want to sell and that is higher prices. They have to bid it up. The banks do a tremendous job of this. They trade off of this stuff and they hedge against all sorts of things—the stock market, bonds, other commodities, other grades, physical outlets—but the bottom line to all of this is that what’s coming into the market is an inflow of buyers. And in essence the pool of sellers is something you have to create on the backs of people who want to play. It doesn’t go one way, it goes in fits and starts, but those are the influences that are impacting the market over time. They want to argue that in the end the market takes care of itself. You can argue that but I disagree. What you cannot argue in any way shape or form is that it creates an enor- mous amount of volatility unnecessarily.” While it is difficult to find an argument today that disclaims speculation playing a significant role in oil prices, you can readily find arguments that speculation is merely a helpful tool and that prices might be out in front of reality, but that they are preparing and easing society into the rapidly approaching time where these prices will be a reality. As noted previously, that itself is debatable. Another argument, and one with considerable merit, is that you should not blame speculators as much as you should blame monetary policy. With the looming debt crisis there is a realistic concern that the Federal Reserve solution will eventually be to 26 MAY 2011 | FUEL OIL NEWS | www.fueloilnews.com devalue the dollar and generate inflation. This takes commodi- ties beyond mere portfolio diversification and into an active and preferred investment strategy. “In 2007 Ben Bernake started to give us an introduction to himself just as oil prices were starting to selloff from the previous summers high of $78 and change,” said Beutel. “At that point he let everyone know that he was going to let interest rates stay at a particularly low level and from there oil prices broke above the $78 dollar level and kept going up to $147. Since that time, he has been extraordinarily thoughtful and considerate of the people on Wall Street and made sure that they don’t ever have to guess what he is thinking or planning on doing. So we now have things like quantitative easing and if you look back in September when he started to float the idea oil prices began moving up rather substantially from that point.” IS REGULATION THE ANSWER? If excessive investment and speculation are the problem, then what is the answer? While the industry typically is not a fan of regulation, a compelling argument can be made to return the markets to where they were at more than a decade ago with a greater focus on the true commercial players with a return to with position limits, greater transparency and oversight. The Food Conservation and Energy Act of 2008 made some inroads in this effort, but failed to substantially address the Enron Loophole. The Pump Act of 2008 would have been stronger but failed to move out of committee. The next, and most serious step, was undertaken with the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010. The energy portions of the act were spearheaded, in large part, by the New England Fuel Institute and the Petroleum Marketers Association of America and the Act passed in the face of tremendous lobbying from the financial industry. Some energy-related specifics of the new law include aggregate position limits on speculative oil traders; mandated clearing of OTC commodity derivatives; exemption of end-users (petroleum marketers for example) from clearing and margin requirements if they are doing so for commer- cial purposes; and CFTC authority to regulate swaps, OTC, energy-related, and electronically-traded transactions by clos- ing the so-called “Enron,” “Swaps,” and “London” or “Foreign Exchange” loopholes. Financial institutions would also have to separate their com- modity derivatives trades into a separately capitalized entity walled off from federally insured deposits. This would essentially reduce the amount of leverage speculators take in trading West Texas Intermediate crude oil, RBOB, and heating oil contracts. If the intent of the act is fully realized in the rulemaking processes, it has the potential to greatly curb some of the specu- latory excesses of the past decade. The analysts and traders contacted for this article noted they became involved with speaking out on their end when they realized the impact exces-