Do oil gyrations signal fundamental changes?
- By Dan Steinbock
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E-mail Shanghai Daily, March 3, 2016
Current speculation and abrupt price movements are reminiscent of those in summer 2008, when Goldman Sachs predicted that oil prices would exceed US$200 by the year-end. In reality, prices collapsed to US$32 in December. While many industry players took a heavy hit, the projection reportedly paid off handsomely to those banks that shorted the market with leveraged derivatives in oil futures.
Today, there is a sense of a déjà vu all over again.
Two years ago, major oil producers (e.g., ExxonMobil, Chevron and Shell) began to let go of their shale leases. Unlike big oil, shale is dominated by mid-size oil companies. As banks have predicted ultra-low prices at the US$20 range, they have reportedly lent billions of dollars to shale players. The more the prices decline, the more shale players suffer defaults. While that’s painful to industry players, it allows big banks to gain greater share of their ownership.
In the US, the giant banks’ huge involvements with commodities, including oil and gas, and the associated market manipulation were publicized by a 2014 Senate Subcommittee report which concluded that “Wall Street banks have acquired staggeringly large positions and executed massive trades in oil, metal, and other physical commodities.”
Today, there has been a wealth transfer of an estimated US$3 trillion a year from oil-producing (emerging) economies to oil-importing (advanced) economies. In this status quo, disruptive price fluctuations benefit the financial players — as they did during the global crisis.
Dr Steinbock is the CEO of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see www.differencegroup.net
