Who's to blame for $145 oil?

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Oil futures trader.

Crude oil has risen 77% in the last 12 months, triggering fears of global recession. But is OPEC to blame for the crisis, or have prices been driven up by the speculators?

On 2nd January Richard Arens, a lone trader on the New York Mercantile Exchange, paid significantly over the odds to snap up 1000 barrels of crude oil. When he sold them a few moments later - at a US$600 loss - the speculator was out of pocket but he had secured his place in history as the man who pushed the price of oil to a record US$100.

Today, while the Gulf's oil-producing states can look forward to a US$1bn-a-day petrodollar surplus, oil consumers in the West are looking for someone to blame for crude oil that has topped US$145 a barrel.

And the heat is on risk-takers such as Arens, who buy a commodity like oil when they think the price is likely to rise, and they'll be able to sell for a profit.

OPEC says that soaring demand and supply constraints are underpinning the rise; in the US and Europe, politicians are calling for the reining in of speculators blamed for flooding the oil contracts market and distorting the real cost of the commodity.

On Capitol Hill, irate Democrats have called for rules compelling traders to take delivery of crude oil, a move which would paralyse the market. In Europe, leaders have proposed a worldwide ban on oil trading by speculators, blaming the latest spike in crude prices on manipulation by hedge funds.

Oxford Business Group (OBG), a London-based research and consultancy unit, suggests that large amounts of speculative investments in oil may be having a "significant impact" on oil prices. As the global economic slump deepens, investors are increasingly looking for exposure to commodity prices rather than more traditional assets such as equities or bonds - and this shift could be the reason that 2008 consumers are facing unprecedented pain at the pumps, it said in a report.

On July 11 total trading volumes on Dubai Gold and Commodities Exchange (DGCX) touched a record new high of 14,066 contracts, registering the exchange's highest overall daily value of above US$978m.

"There's no doubt that we are in a commodities super-cycle, and interest in commodities is at an all-time high," Malcolm Wall Morris, CEO of DGCX, tells Arabian Business. "Market sentiment can be that commodities are not correlated to other asset classes such as fixed-income and equities, so for risk management purposes or investment purposes they can offer an opposite to those markets."

The exchange's recently launched crude oil contract, the West Texas Intermediate (WTI), is its star performer - and set a new record with 3871 contracts traded equivalent to over US$562m. On the same day, Brent crude closed at US$144.49, up 32.3% since the beginning of the year. Oil futures reached a record US$147.27 a barrel on July 11, and have risen 87% in the past year.

"The high oil price has already triggered a long-term change in not only the finance world and the general economy, but the lives of every single person on this planet," says Aalaeddine Chahbi, a hedge fund manager with Dubai-based Evolvence Capital, which manages around US$1bn

"Over the last year, between 60 and 70% of the volume traded was traded on a speculation basis, meaning it was not oil intended for consumption or for reserves. That's a really big number, and I know that theoretically it can sometimes be even bigger than that because you can buy and sell more than what is actually consumed. One thing's for sure - funds in general have a significant role in this price appreciation."

And as the price of oil rises higher, it may become more difficult to explain away by pointing to rising demand - which has been increasing relatively moderately until now.

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