RIYADH, May 24: With crude prices hovering around $135-mark and no immediate end in sight to market turbulence, the question what is pushing the market to dizzying heights is of real concern. And with things beyond the very fundamentals, it is literally difficult to provide an explanation.

William Engdahl, the author of “A Century of War: Anglo-American Oil Politics and the New World Order”, sheds an interesting light on the subject.

Engdhal looks at the entire situation with a fresh perspective. Not shy of challenging established theories, he comes up with fatal counter punches.

In a recent write-up he claims that as much as 60 per cent of today’s crude oil price is pure speculation (Mr Bush please take note), driven by large trader banks and hedge funds. Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left Opec and gone to Wall Street, Engdhal underlines in his paper.

The development of unregulated international derivatives trading in oil futures over the past decade or more has opened way for the present speculative bubble in oil prices.

Today’s oil prices are determined by a process so opaque that only a handful of major oil trading banks, such as Goldman Sachs or Morgan Stanley, have any idea about who is buying and who is selling oil futures or derivative contracts, that set physical oil prices in this strange new world of “paper oil,” Engdhal argues.

A June 2006 US Senate Permanent Subcommittee on Investigations report on “The Role of Market Speculation in rising oil and gas prices,” noted, “ . . . there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices,”- and indeed who can deny!

What the Senate committee staff documented in the report was a gaping loophole in US government regulation of oil derivatives trading. Commodity Futures Trading Commission (CFTC), mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation has walked away rather deliberately from its oversight responsibilities, alleges Engdhal.

In recent years there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, as in NYMEX, but which are traded on unregulated OTC electronic markets, making them independent of any regulatory controls and oversight.

Engdhal says the trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernisation Act of 2000 in the waning hours of the 106th Congress.

“In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is also no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (open interest) at the end of each day.”

In January 2006, the Bush administration’s CFTC also permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London - called “ICE Futures”.

And thus despite the use by US traders of trading terminals within the United States to trade US oil, gasoline, and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.

Thus people within the United States seeking to trade key US energy commodities are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

And the results are before us. The price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. It is interesting to note here that the ICE Futures in London is owned and controlled by a USA company based in Atlanta, Georgia.

In January 2006, when the CFTC allowed the ICE Futures, oil prices were trading in the range of $59-60 a barrel. Today some two years later we see prices topping $135 plus mark and still rising. And in the meantime, large financial institutions, hedge funds, pension funds, and other investors have also been pouring billions of dollars into the energy commodities markets to try and take advantage of price changes or hedge against them. There are no precise or reliable figures as to the total dollar value of investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.

This large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market.

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JPMorgan Chase are major players and fund numerous hedge funds as well as the speculators.

In June 2006, oil traded in futures markets at some $60 a barrel and the Senate investigation estimated that some $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60. That would mean today that at least $50 to $60 or more of today’s $125 a barrel price is due to pure hedge fund and financial institution speculation, Engdahl argues.

The increased speculative interest in commodities is also being seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investment in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years.

Indeed there is a lot more than what meets the eye.