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Investors not scared off by oil price swings

Published Aug. 24, 2005

The jarring swings in oil prices that gave investors and traders whiplash in 2004 are not preventing new investors from rushing into oil and other energy-related commodities this year.

These investors are attracted by the promise of better returns than those offered by bonds and equities, bankers and traders say. Ultimately, the rising number of speculators could lead to even more price volatility in 2005 as they push the highs higher and the lows lower.

Speculation on oil prices is not limited to hedge funds, which were popular scapegoats for high oil prices last year. Some of the largest pension funds, insurance companies and endowments are moving more and more money into commodity indexes, which are heavily weighted in oil and gas futures. Wealthy private investors are also snapping up new oil price-related products.

"After a generation in the wilderness," the oil futures that are used to make a bet on oil prices "have become a bona fide investment," said Charles O'Donnell, who manages Lake Asset Management, a small energy fund in London.

In November, 64.4-million futures and options contracts for light crude oil, the industry standard, were traded on the New York Mercantile Exchange, the biggest oil futures market. That was an increase of 15.6 percent from 55.7-million in the month a year earlier.

On the International Petroleum Exchange in London, the second-biggest market, 3.098-million contracts were traded in November, the latest month from which figures were available, which was up 20 percent compared with the month a year earlier.

Oil futures make up 40 percent of the Goldman Sachs Commodities Index, which attracted about $30-billion in investment by the end of 2004, about double the amount at the end of 2003 and up from $3-billion in 1998. Investors put $10-billion more into other commodities indexes by the end of 2004, according to Goldman.

Commodity specialists say they do not expect these increases to disappear. David Kitson, head of global energy at J.P. Morgan in London, said investment in the commodity markets by pension funds and hedge funds would continue to rise in 2005, based on the level of interest expressed by clients. "There are more investors coming in," he said.