Commodities | Aug 24 2006
By Greg Peel
For some reason there is a growing belief that the oil price is artificially inflated by investor inflows (perhaps in a way that gold appeared to be earlier this year) and that any toppling over of the fear premium could lead to mass panic as investors head for the exits. One analyst is reported in the Wall Street Journal as suggesting oil will reach US$50/bbl by next year, and another poor misguided fool sees single digit prices in three years.
Barclays Capital stops short of being incredulous, but does provide some solid home truths. And this is before we even talk about growing demand from the developing world.
Barclays estimates that across all categories of commodities, in both futures and over-the-counter positions, there is US$100-120 billion of investment. Does this number seem big? Well consider first that the market capitalisation of the world’s five biggest oil companies is more than US$1.3 trillion. The current market cap of Exxon-Mobil alone is US$417 billion and institutional investors currently hold 52.3% or US$220 billion.
Investors hold twice as much capital in Exxon-Mobil alone than they do in all commodity investments.
The total assets held by institutional investors is some US$50 trillion, so that means they hold less than one quarter of a percent directly in commodities.
But wait, there’s more.
Allowing for all oil transactions, physical and derivative, the current nominal annual value of the world’s oil market is US$40 trillion. There would certainly be some price response if, out of the US$120 billion of commodity investment, oil was suddenly sold down, but single digits?
Barclays notes (and this may have something to do with sell down fears) that Iran appears to have tempered its nuclear stance by asking for more time, but this is only likely a ploy to split the security council between those (eg China and Russia) who would like to offer more time and others (eg the US) who are already impatient.
There is no indication Iran will give way on nuclear enrichment. There is every indications the response will be “robust”, says Barclays.
If anything, Barclays is expecting institutional investment in oil to grow.