Oil prices: George Soros warns that speculators could trigger stock market crash

9.45am BST


* Graeme Wearden
* guardian.co.uk,
* Tuesday June 3 2008

George Soros, the billionaire hedge fund manager, will warn later today that the oil price has become a bubble that could trigger a stock market crash.

The Financial Times reported today that Soros will tell the US Senate commerce committee that oil was pushed to its recent all-time peak of $135 a barrel by a new wave of speculators.

He believes that the doubling in the price over the last year is partly due to investment institutions, such as pension funds, who are pumping money into indexes that track the cost of crude.

According to the FT, Soros will warn that there could be very serious consequences for global stock markets if the institutions suddenly began betting on a fall in the oil price.

He compares it with the stock market crash of 1987, which was partly caused by a sudden rush of money into portfolio insurance – which institutions used to protect themselves against a fall in share prices.

"In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash," said Soros, in remarks prepared for a committee hearing later today.

Institutional investors can use index funds to bet on the future trends of a commodity such as oil, in the same way that such funds are used to track the performance of a stock market index like the FTSE.

Last week, the Senate commerce committee heard that the amount of money pumped into commodity-index investing has soared to $260bn (£132bn) this year, from $13bn in 2003.

Soros himself is no stranger to market speculation, having made a profit of around $1bn in 1992 betting that the UK government would be unable to keep sterling within the European Exchange Rate Mechanism.