Oil, the world’s black gold, is currently trading at about $93 per barrel, or about 116 ($50 per barrel) percent higher than it was during its low in the first quarter of 2009. With the price of oil now generally ticking upwards, one might reasonably ask what’s causing the oil price fluctuations.
Of course, there are the standard explanations, such as oil supply shocks, which include such issues as political risk associated with the Middle East or weather related 
problems in the United States.
On the demand side, referred to as oil demand shocks, such things as slowing demand from China or the United States are oft-cited reasons for declining prices while the opposite holds true if prices are increasing.
In addition to these often used explanations – and ignoring oil cartel and political entities’ market manipulation effects – there are other well-thought out reasons, such as the affect of dollar appreciation or depreciation and the affect of the effective federal funds rate. These two, and many other world-moving variables, are generally statistically significant in providing some explanation behind oil price movements (the charts below may not show an easily decipherable connection between the variable of interest and the price of oil, but upon closer inspection it’s straightforward to show using standard econometrics).
The story behind the math of explaining oil prices, of course, doesn’t stop with these economic variables. In addition to these, one recent explanatory variable that provides much more explanation behind the movements in oil prices recently is the flow of investor funds into commodity index funds and managed commodity mutual funds. Perhaps not surprisingly, as a matter of fact, flow of funds into these commodity funds provides at least four times as much explanatory power behind the oil price “mystery” as do any of the previously mentioned factors (at this moment, one could ignore the fact that a flow of funds into the broad “commodity” category isn’t just represented by oil).
With this background in mind, the question is: how much effect would you guess the private equity profession is having on the price of oil?
We generally “know” or presume to know that most of the commodity inflow money is going to hedge funds and other similar money managers, but how much is going to private equity and how much influence is the industry having?
One way of answering this question could be back into the flow of funds into private equity commodity funds, although this method isn’t as readily available as other commodity flow data.
Another back-of-the-envelope way of getting at the effect of private equity would be count up all the acquisitions of private equity firms of commodity trading hedge funds, such as Carlyle Group LP’s recent acquisition of Vermillion Asset Management LLC (at the time Vermillion had $2.2 billion of assets under management).
Because the data, at this point, on private equity involvement in the commodity space are still difficult to come by, it’s only speculation on the actual quantifiable effect private equity is having, but with recent acquisitions such as Carlyle’s, one has to wonder if the private equity industry could move the price of crude, for instance, by a few percentage points a year (with the other major players having their say).
Overall, the private equity industry appears to playing a bigger role in the commodity price setting process, including the price of crude oil. How much of a role is, of course, debatable, although it could be a more important player than some may assume.
Comments on this entry are closed.