MK: Crude Oil and Gold Prices Surge as Speculators Bet Billions Shorting the U.S. Dollar
Kerri Shannon writes: Oil reached a 29-month high (yesterday) Monday morning in London and gold hit an intraday record as investors sought to hedge against inflation and traders bet billions shorting the dollar.
Brent crude futures contracts in London gained 0.1% yesterday to close at $116.11 a barrel, pushed higher by the Middle East crisis disrupting the oil supply. Crude for April delivery was up 0.9% to $105.36 in Monday afternoon trading on the New York Mercantile Exchange (NYMEX).
Fighting in Libya so far has reduced the country's oil output by 1 million barrels per day.
Libya's oil outflows will continue to decline as major U.S. oil companies have stopped trading with the country due to U.S. sanctions. Exxon Mobil Corp. (NYSE: XOM) and Morgan Stanley (NYSE: MS) announced they had stopped trades with Libya, and ConocoPhillips (NYSE: COP) said it was no longer exporting oil from the country.
Besides supply constraints, speculators have proved to be another driving force behind surging oil prices.
Speculators bet that oil will continue to power into the triple digits and have poured billions into oil futures. Investors last week bought 50,200 more contracts in West Texas Intermediate (WTI) crude. That brought the total number of futures contracts to 268,622, representing nearly 269 million barrels.
That's six times as much oil as can be stored at the WTI trading hub, according to Stephen Schork of the energy markets newsletter The Schork Report.
"It does not get any clearer which way Wall Street is trying to take oil," Schork wrote.
Analysts from Commerzbank AG (ETR: CBK) forecast Monday that WTI crude will average $107 in the second quarter, pushing gasoline prices closer to $4.00 a gallon. The national average for regular gasoline hit $3.38 a gallon on Feb. 28, up from $2.70 a year prior, according to the U.S. Energy Information Administration.
To protect the U.S. economic recovery, the Obama administration may tap U.S. oil reserves to combat rising crude prices. The 727-million-barrel emergency reserves are rarely tapped and have only been used twice in the past 20 years.
Consumer fears over high oil and gasoline prices pushed investors toward gold, which started the week hitting a record spot price of $1,444.40 an ounce. Silver also hit a 31-year high of $36.70 an ounce. Investors have turned to the precious metals as a hedge against inflation, their interest boosting prices even higher.
"The geopolitical risk premium is clearly reflected in the gold price," Robin Bhar, an analyst at Credit Agricole SA (EPA: ACA) told Reuters. "The violence (has) intensified, which does prompt suggestions of civil war in Libya."
Commodities were up overall as cotton led the sector higher, rising a daily limit of seven cents, or 3.3%, to hit a record $2.197 a pound.
Speculators driving up commodities prices could put the brakes on a U.S. economic recovery for the rest of 2011.
"Our analysis shows the maximum impact of oil on growth occurring with a lag of 3-4 quarters, which would point to a peak impact in late 2011," Goldman Sachs Group Inc. (NYSE: GS) analyst Jan Hatzius wrote in a note to clients last week.
