A liquidity boom, fuelled by lower US interest rates and a flight from asset-backed commercial paper, has sparked a vivacious rally in the oil and commodity markets.
Oil has surged 30 percent and gold 20 percent since the Federal Reserve cut interest rates in mid-August and central banks pumped billions of dollars into financial markets to ease a liquidity crisis. Money that was invested in discredited asset-backed commercial paper appears to have found a new home.
"This is largely a liquidity play and you can trace a lot of this back to when the Fed cut rates," said Neil Mellor, currency strategist at Bank of New York Mellon. "In a high global liquidity market, money floods into every asset that isn't nailed to the floor and oil, along with gold, counts among them," Mellor said.
Amid the credit market crisis, investors have fled fixed income and taken their billions of dollars to high-risk emerging market equity and commodity funds.
The US asset-backed commercial paper market has fallen for 11 consecutive weeks to $883.7 billion this week from a peak of $1.17 trillion at the end of July, according to data from the Federal Reserve. In Europe, according to analysts at BNP Paribas, the market shrunk to $192 billion at the end of September from $297 billion at the end of July.
"I think there is probably fresh money coming in," said Michael Lewis, global head of commodities research at Deutsche Bank. Data confirming an influx of new money into the commodity markets is difficult to come by.
Most look to weekly data from the US Commodity Futures Trading Commission to gauge changes in investment volumes. The CFTC reported that speculative bets on gold futures at the COMEX division of the New York Mercantile Exchange hit a record high last week as traders bet the market would rise further.
Bullish positions in crude futures have also spiked in the last few weeks. "We are certainly seeing new length coming in ... and the speculative money that is long of the market isn't showing any signs of taking profits yet," said Christopher Bellew, senior vice president of Bache Commodities.
Opec ministers and major energy companies have repeatedly attributed record high oil prices to speculative bets, not a lack of supply. "We find it hard to explain the current prices because at the end of the day you do not see anyone queuing for fuels nor are there any physical shortages," said Peter Voser, chief financial officer for Royal Dutch Shell on Thursday.
Markus Mezger, who manages investment portfolios at Tiberius, said he did not believe a lot of fresh capital was coming into the oil market now from the hedge fund sector. It was more of a case of current investors closing out short positions, or bets that the market would fall, he said. "It's more or less nobody wants to be short in this market," he said.
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