Paper trade in oil may crash Asian economies

Published November 13th, 2000 - 02:00 GMT

Paper trading on futures and commodities markets poses a greater risk to oil price volatility for Asian economies than physical trade, an industry publication said yesterday. 


Oil has evolved from being a mere commodity into a financial instrument much like currencies or bonds following the setting up of over-the-counter oil derivatives and swaps in New York and London, said Energy Asia, which tracks the industry from Singapore. 


Funds have been set up to trade these instruments as they would a currency or bond, it said. 


“Thus, when Palestinian youths riot, the world looks to the futures and exchanges in New York and London, not Organisation of Petroleum Exporting Countries (Opec) to set the price of oil,” it said. 


“As a currency, oil is now in the hands of the fleet-footed trader. They could set off a run on Asia’s economies again if they are panicked into buying oil over the next few months.”  


Comparisons with the oil crisis in the 1970s fail to give the complete picture because at that time global markets where paper commodities trading could take place at the touch of a button were still undeveloped. 


Current economic analyses on oil price volatility were also inaccurate because they have focused on physical consumption and trade, Energy Asia said. 


By most estimates, the size of the paper oil markets is “easily 20-30 times” bigger than the physical market, which has declined over the past three decades, it said. 


The rise of the paper market “has weakened Opec’s ability to set prices at whim,” it said. 


Such power to set prices now rests largely with paper traders in large oil firms, financial houses on Wall Street and speculative funds established to trade commodities, it added. 


Comparisons could be made between the impact of speculative funds on Asian currencies during the financial crisis in 1997 and speculative trading on oil futures, Energy Asia said. 


“If we had a war, cold weather, a stock market crash or a combination of these developments, funds could well stampede into the oil futures and swaps pits at the press of a button or a phone call. 


“As prices climb, buying points set by program trading would be triggered off, sending the markets to even higher levels than they might have risen under a system based strictly on physical supply-demand balances,” it said. – AFP  

(c)--Agence France Presse.

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