Publications: Notes at the Margin

Drowning in Oil: The ETF Complication (April 13, 2015)


Once upon a time, it was so easy. OPEC countries boosted oil production. Prices dropped. Non-OPEC production declined. Market stability returned and higher price levels were restored. This scenario is ancient history. Today, as Benoît Faucon and Summer Said explained late Friday in The Wall Street Journal, Saudi Arabia is “struggling to maintain its share of the global market,” which pits it against its former allies in the Persian Gulf and the United States.

Oil ETFs and other instruments are inhibiting Saudi efforts to force higher-cost producers to cut output or shut down, deepening the price decline and prolonging the agony. The week's report explores the ETF effect. Passive investors have become a problem as the financial transfer from investors to hedgers continues to stimulate production in the US, denying those in the Middle East the decline in non-OPEC output they hoped to achieve.


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