Major investors pushing oil as investment tool despite risks

LONDON, Nov. 10 (UPI) -- High-value investors including the pension funds are pushing oil as an instrument of high-yield investment, a factor that is keeping oil prices high amid low interest rates and low energy demand, a London think tank said Tuesday.

The London Center for Global Energy Studies said the U.S. Federal Reserve's decision to keep interest rates low had contributed to investors flocking to oil and other commodities as high-yield instruments of investment.

"In the light of a revivifying world economy, oil, along with other commodities, is seen as an attractive investment opportunity, not only because oil demand is expected to rise, but also because the Fed's loose monetary policy has encouraged a booming carry trade in U.S. dollars," CGES said in its Global Oil Insight report.

Manouchehr Takin, a co-author of the report and senior petroleum upstream analyst at the center, told United Press International the speculative buying into futures and other instruments was fraught with risks and a virtual bubble that could burst if oil prices collapsed.

"There is no reason for oil prices to be as high as they are now, except for reasons of oil being chosen as an asset for investment," he said in an interview. Takin cited pension funds and other major institutional investors that were disillusioned with banks and stock markets among players behind the strong oil prices.

Paper barrels -- trade in virtual barrels of oil -- were responsible for keeping oil prices at the levels they are at present, Takin said.

Crude oil prices rose to nearly $80 per barrel on the New York Mercantile Exchange early Tuesday.

Noting that oil prices had recovered from as low as $40 a barrel recently to present levels, Takin said, "The 80-dollar price cannot be explained by fundamentals. This price is simply wrong. It seems like a ridiculous thing for me to say, but one cannot explain this price by looking at fundamentals, which are very low indeed.

"The global economy is still weak, demand is low, stocks are high, and experts are still divided over the outlook for 2010. While some envisage growth, others predict a deeper recession.

"So, none of these factors can be behind the current price," he said. "It has to be the investors who are pouring money into oil. Some are simply buying oil, physically, and keeping it in storage on giant tankers. Others are just trading in paper."

Takin said government cash infusions into propping up economies, especially banks, would not hasten recovery. If anything, those measures would slow recovery.

"It cannot go on like this," he said. If investors in oil futures saw returns weakening by early next year, they could most likely ditch it, causing oil prices to weaken or even crash.

The current strong oil prices were good for the oil exporters and those who have pumped billions away from the stock markets and bank deposits into oil. But they were not good at all for large emergent economies like China, India and the developing world, where high oil prices continue to be a deterrent to stimulating growth.

"The irony is that the high oil prices resulting from these plays may weaken the economic recovery the Fed is trying to foster," the CGES report said. And, it added, oil is not the only commodity attracting investors, as indicated by a surge in metal prices.

The center warned that the price rises observed since January across the spectrum of commodities was "reminiscent of previous bubbles and could derail the incipient economic recovery."