Chris Price and Joe Wright
The Trump administration is considering intervening in oil markets to push down prices despite warnings that it would risk a “biblical disaster”.
Doug Burgum, the US interior secretary, said officials had discussed trading in the so-called futures markets after war in Iran put the price of oil end last week at $US103 ($147) a barrel.
Burgum said there “has been a discussion” about an intervention in the market by which traders buy and sell contracts agreeing on a price for oil to be delivered at a future date.
“We have a lot of smart people working in this administration – a lot of smart people work in the energy trading market,” he told Bloomberg Television.
The admission comes after speculation last week that the White House had already intervened in an attempt to push down prices.
Oil surged to $US120 a barrel in early trading last Sunday night before rapidly falling back to $US90, a move many investors struggled to explain.
The White House denied it was responsible for the drop, but market speculation was enough to prompt a warning from the boss of the Chicago Mercantile Exchange (CME), where oil futures are traded.
Terry Duffy, the CME Group chief executive, said government intervention risked a “biblical disaster”.
He warned that attempts to artificially push oil prices down could fatally undermine faith in the market, with potentially dangerous consequences for the broader economy.
“Markets do not like it when governments intervene in pricing,” he told a conference in Florida last week.
The $US500 billion-a-day oil futures market is far larger than the trade in physical oil and forms a crucial part of the modern global economy.
Oil companies and airlines use futures contracts to guard against any unexpected leaps in prices in months ahead, while banks and hedge funds also bet on moves in the price of oil to earn profits.
The price of oil on the futures market is the most widely quoted benchmark and its surge to $US103 a barrel has created uncomfortable headlines for Donald Trump, whose war in Iran is increasingly unpopular at home.
Under the likely White House plan, the US government would spend large sums to bet that the price of oil will fall. The US Treasury’s financial heft may allow it to skew the market to lower prices. However, experts cast doubt on the White House’s ability to bring down prices even given the substantial financial resources available.
‘Never been done – for good reason’
Chris Hodge, an economist at investment bank Natixis, said the US Treasury could use its reserves of around $US200 billion for an intervention at short notice. However, this would be “merely a drop in the bucket”, he said.
“It’s not going to cause a huge help in the short run, and it will be entirely ineffective in the medium to long run,” he said.
“This is a really deep market and continued intervention is not economically feasible. It’s not financially feasible and it’s not going to be politically feasible either.”
Felipe Schuurman, the chief executive of energy analytics firm Sparta, said oil trading by the US government had “never been done – for good reason.
“Even the US Treasury, with significant capital at its disposal, would struggle to sustainably move prices against a supply deficit of this magnitude.”
He added that attempts to drive down the price would also do little to address the fundamental problem: a shortage of oil.
“This is not speculative froth; it is the market correctly pricing a historic physical supply shock,” Schuurman said. “No amount of futures selling changes the fact that barrels are not reaching refineries.”
Speaking to Bloomberg, Burgum acknowledged an intervention “to try to manipulate and lower prices would require enormous amounts of capital”.
Feeling the pressure
The White House is considering such a radical option amid growing concern about rapidly rising prices.
Oil has risen in price by more than 40 per cent since the start of the Iran war because of the effective closure of the Strait of Hormuz, a waterway through which a fifth of the world’s oil and gas exports pass.
The rising price of crude has pushed up petrol prices in the US and in turn increased pressure on Trump before the midterm elections this year.
In Britain, petrol prices have hit an 18-month high. European jet fuel prices have also risen to a record high.
On Friday, Trump said US forces had “obliterated” military sites on Iran’s Kharg Island, home to the country’s main oil export terminal. In response, Iran has threatened to attack oil wells and gas terminals in neighbouring countries.
Mohamed El-Erian, chief economic adviser at Allianz, said on X that the press would have been “screaming about another surge in oil prices if the markets weren’t closed for the weekend”.
Hodge said: “If the administration really wanted to bring oil prices down, the solution would be diplomatic, not economic.
“You would be talking about OPEC increasing production and that’s really difficult to do, even in the best of times. So I don’t think there’s really any levers the administration can pull to have a durable effect on oil markets.”
The Telegraph, London
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