By Trent Jacobs
trent@caymannetnews.com

As oil continues to post record highs, international energy experts and the US government are pointing to possible links between futures traders and price spikes.

For years, Cayman’s residents have been paying more for energy than their North American counterparts, but the recent record increases at gas pumps worldwide have led to international concerns over rocketing prices.

The US agency responsible for tracking and enforcing trade laws, the Commodity Futures Trading Commission, has confirmed that they are investigating possible oil price manipulation by major institutional investors.

“In light of the recent rise in crude oil and other commodity prices and the influx of new investors into commodity futures markets, the Commodity Futures Trading Commission (CFTC) is announcing the formation of an interagency task force to evaluate developments in commodity markets,” the CFTC said in a statement.

“The task force - which includes staff representatives from the CFTC, the Federal Reserve, the Department of the Treasury, the Securities and Exchange Commission, the Department of Energy, and the Department of Agriculture - will examine investor practices, fundamental supply and demand factors, and study the role of speculators and index traders in the commodity markets.”

The price of a barrel of oil has more than doubled in the past year and Russia’s Gazprom, the world’s largest energy company, is predicting that US$250 a barrel could soon be a reality. This latest estimation is even gloomier than investment bank Goldman Sachs’ recent prediction of US$200 a barrel by 2010.

Unprecedented rises such as the almost-US$11 increase recorded Friday, 6 June, have come on the back of such dire predictions by both Goldman Sachs and Morgan Stanley on future prices, which oil analysts blame for the continued market volatility.

Abdalla Salem El-Badri, the Secretary General of the Organization of the Petroleum Exporting Countries (OPEC) last month addressed the issue, noting that prices were continuing to trend upward even though there was no shortage of oil.

“In recent months, oil prices have become increasingly volatile, mainly driven by financial market developments and the increased flow of speculative funds into oil futures,” Mr El-Badri said.

“The turmoil in some global equity markets and the considerable depreciation in the US dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market. This has driven prices higher.”

Mr El-Badri went on to say in his statement that oil inventories are rising around the world and some OPEC member countries are even having a tough time selling their oil.

“A number of new OPEC crude oil projects have started to come on-stream and OPEC spare capacity continues to increase, with the figure currently standing above three million barrels a day. At the same time, crude oil movements indicate that some member countries are unable to find buyers for their additional supply.”

Other leading energy analysts predict a slight drop in prices, claiming that market traders have artificially inflated the prices.

While acknowledging that speculative trading is involved in the recent price spikes, Tim Ridley, Chairman of the Cayman Islands Monetary Authority, believes that there is no single culprit to blame for the oil problem.

Mr Ridley told Cayman Net News, “It seems likely that there is some speculative money in the market and there may be some bubble aspects. Part of the increase is also due to the decline in the US dollar with the increased price of oil simply compensating for that.”

If the oil bubble does burst it won’t be anytime soon according to most energy analysts.

While there is data showing that increased fuel prices have lowered demand in North America and Europe, the rapid growth of countries like India and China is expected to fill any gaps. Additionally, the world’s number one consumer of oil, the United States, has not built a new refinery in more than 30 years.

“Ultimately it is actual supply and demand that drives the price. As long as demand is strong worldwide, even with the US slowdown, and there is no increased supply coming through, the price will go up,” Mr Ridley said.

Eduardo Silva, Chairman of the Cayman Islands Financial Services Association, said, however, that while investment bankers make an easy target, the driving force behind the recent fuel spikes is simply growing demand.

“I don’t think hedge funds or players in the financial market are the ones responsible for the increasing prices. There is very little space in between what is being produced and what is being consumed,” he said.

Maintaining the view that there is more than enough supply, OPEC leaders have indicated that when they convene an emergency meeting later this month in Saudi Arabia they will not increase oil production.