Oil Market Needs More Speculators, Deutsche Bank Says (Update1)

Jan. 20 (Bloomberg) -- The crude-oil market needs more speculators to help stabilize prices six months after the traders were blamed for pushing the commodity up to a record $147.27 a barrel, Deutsche Bank said in a report.

A lack of liquidity is distorting prices, particularly for near-term delivery, amid an oversupply of oil at Cushing, Oklahoma, said analysts led by Paul Sankey in New York in the Deutsche Bank report dated yesterday. This is sending the “wrong” price signals to refiners and producers.

“We clearly have a fundamentally imbalanced market, with far too much crude, that needs to be resolved,” the analysts said. “We need more market activity to correct these issues, but for technical, political and financial reasons, the liquidity of the market has dried up and the long-term price of oil is partly distorted.”

The market needs speculators who deal in physical crude oil, actually making and taking delivery of the commodity, the analysts said. Market speculators last year were “paper” speculators, trading oil as a financial instrument and never taking possession of the crude.

Also staying out of the market are mid-cap integrated oil companies who lost money on hedges in place when the market went up and refiners “unwilling” to tie up capital in holding physical oil during the current credit crisis, the report said.

OPEC producers such as Saudi Arabia and major oil companies such as Exxon Mobil Corp. don’t usually do forward sales on exchanges, the analysts said.

Cushing Supplies

Supplies at Cushing, the delivery point for New York futures, reached the highest in at least four years in the week ended Jan. 9, as inventories climbed 2.5 percent to 33 million barrels, according to the Energy Department. It began keeping records for the location in 2004.

Oil futures for delivery in March cost about $8.14 a barrel more than for delivery in February last week, allowing traders to profit by buying and holding oil, if they have the ability to store it. The differential was $2.10 a barrel today, as February oil expired.

Oil for delivery a year from now cost $16.97 a barrel, or 44 percent, more than for February 2009.

‘Bust Cycle’

“We are now in an over-supplied bust cycle, and we need lower prices either to encourage demand or decrease supply,” the analysts said. Production cuts by the Organization of Petroleum Exporting Countries haven’t helped enough because lower oil prices haven’t spurred an increase in demand.

The International Energy Agency, an adviser to 28 nations, said last week that oil demand will fall for a second year in 2009, the first back-to-back contraction since 1983, as a deepening recession erodes consumer spending.

“We don’t believe that OPEC is doing enough to address over-supply,” the analysts said in the report. The Organization of Petroleum Exporting Countries agreed to a record 9 percent reduction in supply targets at its last meeting in December to try to halt the plunging price of oil.

Crude oil for February delivery rose $2.23, or 6.1 percent, to expire at $38.74 a barrel on the New York Mercantile Exchange. Futures touched $32.70 earlier today, the lowest since Dec. 19. Prices are down 59 percent from a year ago.

Floor trading was closed for the Martin Luther King Jr. holiday yesterday. Electronic trades were booked today for settlement. The more-active March contract fell $1.73, or 4.1 percent, to $40.84 a barrel.