More on the oil speculators in later blogs, I need to report the following to you first.

Michael Masters, principal and founder of the hedge fund firm Masters Capital Management LLC, achieved near rock star status after his recent testimony before Congress about the impact of oil speculators on oil prices.

The hedge fund manager said speculators are largely responsible for jacking up crude oil prices to new heights. A supposed Wall Street insider was finally coming clean, making for great sound bites. Masters reportedly said he is not currently involved in trading the commodities futures markets, that he is not representing any corporation or lobby group, but merely came forward as a concerned citizen.

Recently, the U.S. House of Representatives approved a bill directing the Commodity Futures Trading Commission to invoke emergency powers to "curb immediately the role of excessive speculation" in the oil futures market, partly due to his testimony.

Masters introduced in testimony the data point that some $250 bn has been invested in commodity index funds, up from $13 bn in 2003, a stat that's used to argue oil speculators are causing prices to soar. How a hedge fund manager arrived at that $250 bn figure, and what data sources he used and how it was calculated, hasn't been appropriately challenged. It may be right-it may be wrong.

And Masters, more than regular citizens, apparently has a lot of skin in the game when it comes to getting oil prices lower. Credit Greg Newton at Naked Shorts for diving into filings with the Securities and Exchange Commission to figure out what Masters' hedge fund invests in. 

Newton testified that he has been managing a long-short equity hedge fund for over 12 years and that he has extensive contacts on Wall Street and within the hedge fund community.

But Newton dug into the most recent Securities and Exchange Commission 13F-HR filings for Masters Capital and found that the hedge fund portfolio "is at least knee-deep levered long in US airline stocks and General Motors," which is "doubtless contributing to Masters' distress at crude oil prices." Didn't see that in testimony, did you?

As of March 30, Masters' fund had call positions in AMR Corp (AMR), the parent of American Airlines, Delta Air Lines (DAL), General Motors (GM), UAL Corp., parent of United Airlines (UAUA) and US Airways (LCC). About 30% of his fund's portfolio was in companies that feel the heat from oil price spikes. In the first three months of this year, says the total value of the portfolio declined 35 %, from $1.38 billion to $905 million. BusinessWeekhas been on this story too.

Masters has since said that this math "way off," in part because it did not account for offsetting positions, and other options and derivatives not reported on the SEC forms.

But more to Masters' argument, that futures contracts cause oil price spikes. These are paper barrels, they are not physical barrels of oil. No oil supply is removed from the market in an oil futures trade. Instead, in commodities trading, when oil positions are being hedged, each contract has a buyer and a seller, so for every contract that says that prices are going up, the other side of the trade is essentially betting they are going down, offsetting the trade.

The question is, do the price setters in the markets look to futures prices to set the cost of oil per barrel? Of course they do-it's likely why Saudi Arabia has threatened to keep their oil in the ground for the future generations.  

But supply and demand matter more in setting oil futures prices, which in turn are used to set oil prices. More to the point, it is the shoddy information on forward supply and demand that is hurting the market. More on this in a future blog.

And recently, the country's top energy analyst, Daniel Yergin, head of Cambridge Energy Research Associates, said in testimony before the Joint Economic Committee that when it comes to oil price spikes, history "demonstrates that changes of this scale and significance result not from a single cause, but rather from a confluence of factors."

Yergin acknowledged that speculators have played a role in fueling oil price spikes, however, he said they largely add to the mania behind price scares and noted the credit crisis and a weaker dollar are largely to blame.