Bad Oil Bets Come Back To Haunt Speculators

Surging energy prices are wreaking havoc on producers and speculators who made bets on lower oil prices, forcing some to buy oil to exit their positions. That, in turn, is helping push up oil prices. Producers who long ago struck deals to sell oil in future years are finding they locked in prices at as little as half what oil fetches in today's red-hot market. Some companies are unwinding these deals by buying back their oil contracts. Other market players, particularly speculators who misjudged the top of the market, are being forced to buy oil futures to close out bad bets. Those who tough it out are often being hit with crushing margin calls, requiring them to pony up more cash because their trade has gone deeper into the red. Edward Morse, chief energy economist at Lehman Brothers Holdings Inc., said some traders put big money into complex trades in the fall that fell apart when price relationships flip-flopped the last few days. The market is beset by talk that large producers "wanted to unwind their hedges, putting upward pressure on prices." Many factors are fueling oil's rapid rise besides this financial squeeze. Although demand has eased in the developed world as growth slows, consumption is robust in developing markets. China's stockpiling of oil ahead of the Olympics and use of diesel for power generation during earthquake rescue efforts have played a part in recent spikes. Big oil consumers such as airlines have become so alarmed by rising costs Wall Street trading officials said some are rushing to buy oil to lock in future costs. All this comes on top of heightened concerns that oil production will be weaker than thought. Oil's 15% rise this month has surprised even experienced players in the energy market. After rising 3.3% on Wednesday, oil futures for July delivery on the New York Mercantile Exchange were down $2.36, or 1.8%, to $130.81 a barrel Thursday. Prices of oil for delivery in 2009 and beyond have staged even more dramatic moves, surging 30% or 40% for the month, before settling back a bit Thursday. Other commodity markets have been in the grips of a painful financial squeeze. Even large, well-capitalized commodity merchants were taken by surprise when a number of agriculture contracts soared nearly simultaneously this spring.