Reining in Oil Speculators 20 comments
Tim Iacono
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The Commodity Futures Trading Commission proposed new rules yesterday to rein in speculators in commodity markets so as to prevent a repeat of last year's surge in crude oil prices that, almost exactly one year ago, saw prices peak at almost $150 a barrel.
The Washington Post provides the following details:
The move aims to reduce the volatility of prices but faces resistance from top Wall Street firms, which fear the efforts could cut into profits. Regulators and lawmakers increasingly worry that these firms have used their size and power to inflate the prices of commodities, booking profits in the process.
Concern over such deal-making reached a fever pitch last summer, when oil prices were sky high and people were feeling pain at the gas pump. CFTC data showed last year that a significant amount of trading in oil was concentrated in the hands of just a few speculators. These worries have waned since then, as gas prices have moderated from last year's highs, though a recent run-up in fuel prices may prompt new questions.
With any new heavy-handed regulation, the laws of unintended consequences will quickly come into play as there is a very real (and very understandable) interest by a growing number of investors to exchange their paper money for something more tangible.
While a futures contract via a commodity index fund or ETF is just a paper claim on some commodity, it is, nonetheless, a claim on something that is not so easily produced as the many other "paper" investments available today.
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This article has 20 comments:
The CFTC is planning to announce today that it will consider new curbs, according to an agency statement scheduled to be released today. It would do so by limiting the size of an investment any single firm could make in a particular commodity. The agency is planning a series of hearings on the issue to examine whether such limits would reduce harmful speculation, what the limits should be and whether the agency needs new legal powers to do this.
Adopting new curbs would require a vote by the CFTC's commissioners.
The CFTC already has established position limits for some commodities, such as wheat. But it has also granted exemptions to these limits, which congressional investigators have in part blamed for fueling speculation. The CFTC plans to review its policy on exemptions.
The CFTC is also planning to require more public disclosure about the holdings of commodities traders. For many years, the agency has issued weekly reports about these holdings. The new reports will provide more detailed information about the types of firms, such as banks and hedge funds, that hold significant positions.
It is a convenient excuse to blame speculators for sharply rising asset prices, rather than accept the idea it might be people wanted to hedge against reckless monetary policy.
What the government controls it debases and what it cannot control it seeks to discredit and destroy. To divert attention from rising economic misery and despair in the US, the govt. continually seeks individuals, companies, and nations to blame for self induced national failures and self inflicted economic wounds.
Global markets are bigger, more agile and vastly more innovative than governments. As soon as the government suppresses or criminalizes one set of instruements and existing exchanges, new tools, new exchanges and new technologies will emerge. More risk capital, talent, technology and support services and jobs will be driven away from the US and Europe to Asia which will, within a decade, become the locus of global commodities trading.
Keep us in the dark and fed bullshit.
We mushrooms, 'er sheeple, 'er citizens crave it!
If they regulate/ban the "speculators" just whom will Washington and MSM blame when Cap & Trade, and China's use, shoots commodities, especially gas, to levels never before seen?
I think the powers that be are losing it, they are pre-empting their own best "out" for the future when food riots hit. Fools.
PRICES ARE INFLUENCED BY SPECULATORS, WHO IN TURN ARE INFLUENCED BY FUNDAMENTALS. Thus, prices are influenced by fundamentals.
'Speculation' as it is commonly thought of, or perhaps 'noise trading' is a better expression, does not impact on prices very much. The reason it doesn't is because speculators (on the average) are too smart to go against fundamentals.
I plan to add a few things for my lectures next fall. I hope that nobody makes the mistake of trying to argue with me.
But at what point does normal "hedging" become "speculation?"
And doesn't there come a time where "a few" speculators become many, if enough people are "doing it.?"
On Jul 08 08:59 AM Shale Gas wrote:
> What will the ETF's do if there is a position limit, yet they have
> to buy futures because money is pouring into that particular ETF?
1)world wide demand- Europe, Japan and the US represent 70% of demand. In order for the other 30% to move the needle would take serious escalations in demand all predicated on infrastructure improvements, economic stability and major economic growth. This would take generations to happen.
2)Chaos theory- Something someday will happen. Be it a hurricane, a war, some puny dictator saber rattling, a refinery fire or cold weather in Antarctica. Some basis for investing.
3)Driving "seasons"- there is a summer driving season, a winter holiday driving season, a labor day, memorial day, a thanksgiving driving season. sounds like it's pretty much all the time. Also, doesn't this "theory" fly in the face of the "global demand" story. If indeed it's global demand then what will a few extra miles in an ordinary weekend matter.
The best article I ever saw was written by two guys from Stanford who did an analysis that World Wide oil could be controlled with just $11Bln. Hum, so a market that has the power to destroy our GDP and economy can be controlled with just $11BLn. Now, I know we are all altruistic investors but what if some people got together and decided that they would sell the dollar short bid oil up and short the dow on the basis of the negative feedback loop would raise input costs to producers creating a margin squeeze then they would have to raise prices to consumers- thus killing the consumer. Now, how much money could be made off such a trade? Maybe we should ask Soros.
DUMB MONEY- we are it.
> What the government does not realize is that speculation gives the
> market a lead time to offset actually shortages. Yes it causes more
> volatility, but it also prevents actual shortages of the commodity
> by giving the market lead time to find another source or change product.
> Even with oil at $150, you could still get gas at any gas station.
> By preventing the free market, the next spike up might also result
> in actual shortages.
I agree that the speculators actually make the markets more efficient and are a benefit as long as they are rational. They can cause some dislocations, however, if the market misjudges future supply &/or demand.
A case in point was this spring. The fundamentals would have indicated a lower price than was prevailing, but the futures traders were betting on a higher price a few months hence. This led to the situation of contango whereby big players could buy oil at the relatively low spot price, sell it on the futures market and pay to store it in tankers floating at sea yet still make a significant profit. (1). It did raise the current prices and caused a lot of howling from the public about the speculators causing the prices to rise even as the fundamentals - excess supply and low demand - indicated prices should be falling.
But that isn't an inherently bad situation. It all hinges upon whether or not the speculators were accurate in their predictions. If they were correct that prices would be jumping in a few months, whether the reason might be a recovery in demand or a shortfall in supply, they would in fact be doing the market a favor. It would even out the peaks and valleys in the roller coaster ride of oil/gas prices. Sure it would raise prices in the present, but that would help to dampen demand and increase supplies for the coming crunch that was predicted.
People purchasing new vehicles might take mpg into account a little more. Oil and alternative energy projects might be started or perhaps not canceled or postponed etc. The boom and bust cycles the oil industry are disruptive and inefficient for both the industry and the consumers. Accurate price projections by "speculators" could help smooth all that out and be beneficial for the consumers and the market as a whole.
When they are inaccurate, however, they make the price swings worse, as may have been the case this time. Prices were undoubtedly higher than they otherwise would have been up until now as much oil was put in storage waiting for the higher prices to get here but then may be dumped on the market with already declining prices if the expected recovery in demand never arrives.
But I think the futures market is taking a bad rap with respect to the big spike in prices in 2008. Paul Krugman noted in May 2008 that the telltale signs of a speculators' bubble just weren't in evidence in his article, "The Oil Non-Bubble" www.nytimes.com/2008/0...
A similar case was made by an editorial in Energy Current www.energycurrent.com/... excerpts:
"...After many years of solid growth, oil production plateaued in October 2004. Regardless of the price level, the oil supply simply stopped responding, and from then on, the world had to make do with broadly flat supplies... In the absence of oil supply growth, demand accommodation was required. This was achieved by secular prices rises averaging 25 percent per annum from 2003 to the end of 2007. In other words, the price of oil went up, and this constrained consumption by causing the marginal consumer to drop out of the market.... by the second half 2007, the situation was becoming critical. Consumption was being maintained by continuing draws on inventories averaging 1.4 mbpd, and virtually every producer, with the possible exception of the Saudis, was running flat out. By early 2008, even the Saudis were throwing the kitchen sink at the market - all to no avail. On paper, it looked like a peak oil nightmare.
Of course, consumers were responding. From 2005, the EU and Japan began to shed consumption and, from late 2007, US consumption also began to decline as the US consumer sought to escape high oil prices. Notwithstanding, developed economy consumers were not abandoning the market as fast as Chinese consumers were entering it, and prices continued to rise. In early 2008, prices took off and some argue that speculation took over. Still, as inventories continued to fall until May 2008 and all the oil producers were running at full output, the case for market manipulation at that time is hard to make. Indeed, the market was in backwardation most of this time. In backwardation, futures prices are lower than spot prices, the equivalent of the market saying, "Well, prices are high now, but they'll be lower later." The market - those very speculators - believed that oil was over-priced but was continually surprised as demand kept pushing up prices.
Prices did ultimately fall, but not because the supply situation eased, nor because speculators fled the market, and not because inventories were released. Prices fell because the global economy collapsed."
------
It seems to me that if there is a major problem that needs to be addressed it would be from unethical pushing of derivatives and futures contracts on individuals or entities for whom they are unsuitable. If they are being hawked to conservative pension funds or individuals who don't understand the risks or have any grasp of the fundamentals they could do harm to both the economy and the individuals involved, much as was the case with many of the sub-prime loans pawned off on unsuspecting victims.
But if the players know what they are doing, understand and can afford the risks, those same speculators could in fact be doing a favor to us all.
To the extent that oil and other commodities and real assets are being used as a hedge against inflation, that is a problem with governmental policies that can't really be addressed by a band-aid patchwork of regulations any more than one could expect the little Dutch boy to provide a permanent solution to a failing dike by inserting thumbs into the leaks.
------
Endnote:
1. Morgan Stanley Hires Supertanker to Store Oil
www.oilandgaseurasia.c...
According to the article here is how Morgan Stanley actually played the contango situation to profit with little to no risk:
"Morgan Stanley hired its tanker at $68,000 a day, the two brokers said. That works out at $1.02 a barrel a month, based on a 2 million-barrel cargo. Benchmark U.S. oil futures are trading at an average of $3.65 more than the previous month between February and June."
So, if I understand this correctly, it would work out something like this. They buy 2 million barrels of oil on the spot market and simultaneously(?) sell 2 million barrels on the futures market for $3.65/ barrel more than they paid. They then rent the ship for $1.02/barrel for that month (counting insurance and other expenses?) and pocket a tidy profit when the oil is delivered.
$7,300,,000 gross profit from the sale of the oil 2 ml barrels X $3.65/barrel
-$2,040,000 expenses for renting the ship for oil storage for 1 mo.
-----------------
$5,260,000 profit per month per tanker
the same goes for this govts ideas on finance. on the one hand they're trying everything they can to get credit flowing again and on the other, they're trying to regulate debt which kinda defeats the purpose.
all this meddling for all its good intentions will be disasterous for our economy.
80mm barrels of oil a day, nice round figure
$100/barrel, nice round figure
$8 billion buys all the world's oil production of one day. To put this in perspective, the TARP was for $700 billion, California's deficit is in the $25 billion range.
$3 trillion buys all the world's oil production for a year. The US economy is somewhere between $10 and $14 trillion. The total world economic output is $50 to $55 trillion.
There are trillions of dollars floating around in private equity and sovereign wealth funds. How many days of world oil supply is that?
Is it possible speculators could affect the price of oil?
Is there someone out there unscrupulous enough to try? No, of course not. It would never cross anyone's mind. ;-)
Global Research.
www.globalresearch.ca/...
www.motherjones.com/po...
On Jul 08 01:53 PM mdmrjsds wrote:
> $3 trillion buys all the world's oil production for a year. The
> US economy is somewhere between $10 and $14 trillion. The total
> world economic output is $50 to $55 trillion.
>
> There are trillions of dollars floating around in private equity
> and sovereign wealth funds. How many days of world oil supply is
> that?
>
> Is it possible speculators could affect the price of oil?
>
> Is there someone out there unscrupulous enough to try? No, of course
> not. It would never cross anyone's mind. ;-)
That's an interesting look at the big picture and shows how vulnerable the oil & gas prices could be to moves by some of the big players or by market sentiment.
On the other hand, the futures market would only be one of several potential pressure points for such price moves. Someone with trillions of dollars to play with, or even significantly less than that could do some physical hoarding if they were prevented from participating in the futures market. Or perhaps they could buy up some of the oil companies, wells, ships, refineries or pipelines that could be a choke point, particularly if there is a significant supply squeeze going on.
Someone really ruthless could even help fund insurgents such as those in Nigeria or perhaps even try and stir up trouble over the Canadian tar sands.
Certainly there's a place for oversight of the markets in case things start to spin out of control or someone's trying to play games with the prices, but it's probably no panacea to fix the problem of price spikes. It likely would do little to stop the problems that would ensue in the oil markets if inflation in the U.S. really started to take off. That would be a problem that would need to be addressed at a more fundamental level.
One unintended consequence then was the Turtle Traders, (despite the "Trading Places" bet urban myth) an attempt to bypass the position limits with independent Turtles.
The restrictions are going to prevent the really big guys from gaming the system. Right now the big guys take billions off the top, leaving crumbs for independent investors. They own the system and the politicians. Independent investors and the consuming public, which needs the commodities these people manipulate, are getting the short end.
Of course, the new regulations will stop only the worst manipulation. There will still be a few billions skimmed. Should still be a good bonus year at GS and a good year for political contributions.