Gamblers raise pressure on oil price

RISING fuel prices are starting to bite on the economy. The latest Business Trends survey from BDO suggests they will push official inflation up to 2.6% this quarter, putting pressure on the Bank of England to put up interest rates yet again.

It also predicts economic growth this summer will slow down for the first time in more than a year, as industry feels the pinch from rising oil and the Bank's previous rate increases.

Hauliers were already getting angry over petrol prices. Signs that the Government may delay a petrol tax rise have caused them to stand down, at least for now. But the situation remains edgy.

There are, of course, serious questions about the world's oil supply. Getting less attention has been the role of financial speculation in the latest crisis.

Traders, often using borrowed money, have in recent months bought up all the future oil production they can.

As we showed last week, speculative positions on oil markets have soared to record levels of 10 times the average. Back in the 18th century, when the most important commodity was grain, this used to be called hoarding.

Many traders simply follow momentum or market trends. The further the price moves, the more they pile in.

That drives the price still further, producing apparent profits and drawing in more traders. In the past year we have seen this happen in markets for other commodities, such as copper wire, bonds and in the slump in the dollar.

Each time, a 'story' about fundamentals has emerged to justify the price movements. Commodities soared 'because of Chinese demand'.

The dollar collapsed 'because of the trade deficit'. Bonds skyrocketed 'because of deflation'. And oil soared because of...Chinese demand, US demand and the threat Al Qaeda poses to Saudi supplies.

The story is not completely off target. Oil producers were caught earlier this year by rising demand, particularly from China.

America has added unnecessarily to consumption through the fad for gas-guzzling sports utility vehicles, the result of a disastrous tax break created in the mid-1990s. Saudi Arabia's supplies are vulnerable to disruption by a terrorist attack.

Helping matters was a genuine shortage in US petrol supplies as refineries struggled to catch up with new emissions standards. US petrol prices soared first this year. Crude oil followed in its wake.

But the data shows that while supplies may be tight, there is no immediate shortage. According to the International Energy Agency global demand is about 80.6m barrels a day and output is actually 900,000 barrels higher at 81.5m.

The IEA concedes real demand may be higher than the figures show, but even its top estimates would still leave production just 300,000 barrels short.

By contrast the Opec cartel has ramped up production by 2m barrels, with another 500,000 to come in August. Non-Opec countries are raising production where they can. Russia, the most important, expects to raise daily output by 650,000 barrels this year alone.

The good news for consumers is that speculative bubbles usually end in tears. The market finally stretches too far, on too much leverage. When it swings back plenty of punters get their fingers slammed in the door.

This may now be happening in oil. The price fell $2.50 from its peak last week.

Predicting short-term moves is a mug's game and the next move is as likely to be up as down. And if terrorists succeed in disrupting Middle Eastern supplies, all bets are off. But late bulls in oil are calling a buying opportunity, often a sign the party is over.

Motorists and hauliers - who are hardly in a position to combat the speculators by bear raiding the oil futures market - will certainly hope so.

Though the whimsical thought occurs that if a motor insurer traded some of its float in oil futures, it could compensate drivers for rising fuel prices with lower premium rates.