Gas Prices Rise Near 2008-Highs

The United States, the United Kingdom, France, and Japan have been in talks to ease the shock of rising oil and gas prices by releasing billions of emergency reserves onto the market. The laws of supply and demand dictate that when supply is great, prices should fall.

But the rise in the price for fuel is not an issue of supply and demand, says former Senator Byron Dorgan (D-ND), who helped shape the nation's energy policy as chairman the Senate Indian Affairs Committee and three subcommittees.

"There is no justification for the current gas prices. This is all about speculation by the people who are speculating on the price of oil and gas," he says. "We could shutdown excess speculation in commodity markets. This government should do that."

Senator Bernie Sanders (I-VT) said as much earlier this month. Sanders, along with 70 members of Congress, wrote a letter to regulators at the Commodity Futures Trading Commission (CFTC), urging immediate action on oil speculation by enacting "strong position limits" and to "utilize all authorities available to…make sure that the price of oil and gasoline reflects the fundamentals of supply and demand."

Fadel Gheit, senior energy analyst at Oppenheimer, said he blames spectators for adding "at a minimum" $20 per barrel to the price of oil. In a study of oil prices over the last five years, the St. Louis Federal Reserve determined speculation drove up oil prices by 15 percent. But those estimates are comparatively conservative. The CEO of ExxonMobil (XOM) believes speculation could be driving up oil prices by as much as 40 percent a barrel.

"These are people, by the way, who will never buy oil and never sell oil. They are actually buying and selling things they will never have from people who never had it," said Dorgan. "They are making money back driving up the price at the pump and the American people are the victims."

But for all the lambasting of Wall Street speculators for driving up energy prices, economists at IHS said Thursday they believe new regulation of commodity markets could adversely affect the U.S. economy as a whole.

"The regulations, as currently envisioned, could create a significant ripple effect through the energy economy that would reduce production, increase the cost of electricity and gasoline and ultimately affect jobs," said Kurt Barrow, vice president at Purvin & Gertz, a division of IHS. Why? By limiting commodity trading, IHS says it would make it more difficult for companies that hedge against future oil prices to manage risks.

30-Year Mortgage Dips Below 4 Percent

The average U.S. rate on the 30-year fixed mortgage fell back below 4 percent last week, staying near historic lows.

Mortgage buyer Freddie Mac said Thursday that the rate on the 30-year loan dropped to 3.99 percent from 4.08 percent last week. In February, the rate touched 3.87 percent, the lowest since long-term mortgages began in the 1950s.

The average rate on the 15-year fixed mortgage also fell, to 3.23 percent. That's down from 3.30 percent last week and above the record low of 3.13 percent hit earlier this month.

The low rates have made home-buying and refinancing more affordable at a time when the housing market is flashing small signs of improvement. Still, most economists say it will take years for the market to fully recover from the housing bust.

January and February made up the best winter for re-sales in five years, when the housing crisis began. And builders are more confident about the market. In February, they requested the most permits to build single-family homes and apartments since October 2008.

An improved job market may also be helping home sales. Employers have added an average 245,000 net jobs per month from December through February. That has helped reduce the unemployment rate to 8.3 percent, the lowest level in nearly three years.

Rates rose a bit earlier last month after positive economic news pushed up yields on U.S. Treasury bonds.

An improving economic outlook can lead investors to shift money from Treasury bonds to stocks. That pushes up Treasury yields.

Even with signs of improvement in housing, home prices continue to fall. Millions of foreclosures and short sales — when a lender accepts less than what is owed on a mortgage — remain on the market. And the housing crisis and recession have also persuaded many Americans to rent instead of buy, which has led to a drop in homeownership.

To calculate the average rates, Freddie Mac surveys lenders across the country on Monday through Wednesday of each week.

The average rates don't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.

The average fee for the 30-year fixed loan was 0.7. For the 15-year fixed loan, the average was 0.8.

For the five-year adjustable loan, the average rate fell to 2.90 percent from 2.96 percent, and the average fee was unchanged at 0.8.

The average on the one-year adjustable loan dropped to 2.78 percent from 2.84 percent, and the average fee was unchanged at 0.6.

Investors Take on More Risk; Shun Commodities

Commodities, with the exception of oil, will fail to capture much of the renewed investment appetite for risky assets that has buoyed global markets this year until more clarity emerges about demand from top raw materials consumer China.

Investment has flowed into equities, emerging markets, high-yield debt, and real estate markets in the New Year after improved U.S. economic data and an injection of cheap loans to European banks boosted sentiment, but most commodities markets got only a brief boost.

Asset allocators such as Koen Straetmans at ING Investment Management in the Netherlands are finding opportunities in other risk-on trades until more data comes from China, the biggest consumer of copper, iron ore, steel, and soybeans.

"The macro-economic data out of China is rather clouded for the time being, so we'd like to see some data from March to judge whether end-user demand is really filtering through," said Straetmans, senior strategist at the group, which has about 330 billion euros under management worldwide.

"We still have a slight underweight position in commodities, whereas in equities we are still slightly overweight, so we have the risk-on trade through equities and also through real estate."

The 19-commodity Thomson Reuters-Jefferies CRB index gained as much as 7 percent by late February. But the rise has since been trimmed to 2 percent, despite a strong rise in oil futures, while world equities have gained 11 percent.

Patrick Armstrong, joint managing partner at Armstrong Investment Managers, a multi-asset investor, has been reducing his copper position since February, from 6 percent to 2 percent, taking the view that Chinese restocking is over for the time being.

"People had moved from a very risk-off position to trying to catch up with things (commodities) that have been running," he said. "In the short term we do expect cyclical pullbacks."

Data from fund flows tracker EPFR Global show that cumulative flows into commodity and energy sector funds have failed to match last year's inflows.

Commodity sector funds, which include physical and futures funds and equity funds holding related stocks such as miners, attracted some $3.5 billion globally to March 21, compared with $4.6 billion over the same period last year.

Energy sector funds, which include equity funds and oil and natural gas exchange-traded products linked to futures contracts, attracted some $2.5 billion globally, compared with $5.8 billion last year.

"We've been in an environment which should have been risk-on (for commodities), but very few investors have been prepared to act that way," said Kevin Norrish, managing director of commodities research at Barclays Bank, noting that participation in the base metals rally had been quite thin.

"That may be because there are still dark clouds on the horizon, one of which is the high oil price itself."

Many managers are keen to include crude oil in portfolios, based on political tension between the West and Iran rather than on underlying supply/demand fundamentals.

Brent crude has been a standout performer in the commodity/energy complex, shooting up 16 percent so far in 2012, as investors seek a hedge for other risk assets to protect against an oil price spike.

"Prior to the financial crisis, the last three global recessions were caused by geopolitical events that led to an oil price spike, and that is clearly relevant today. So having some oil in the portfolio seems to make sense," said Robert Farago, head of asset allocation at Schroders Private Banking.

"For the rest (of commodities), we prefer equities to commodities as a risk asset," he added.