Oil Futures Under the Microscope: What Does This Mean for ETFs?

Recent swings in the price of oil have the commodity and the way it’s traded under an intense microscope. What could this mean for these oil ETFs?

Federal regulators have announced that they’re considering trading restrictions on hedge funds and other “speculative” traders in markets for oil, natural gas and other energy forms, reports Edmund L. Andrews for The New York Times.

The Commodity Futures Trading Commission (CFTC) announced several things yesterday:

• It will consider new limits on the volume of energy futures contracts that financial investors will be allowed to hold
• It will also publish more detailed information about the aggregate activity of hedge funds and traders who arbitrage between domestic and foreign energy prices
• Several hearings will be held this month and next; the first will examine whether to impose federal “speculative limits” on energy futures contracts

More and more critics are blaming speculators for the wild swings in oil: last July, it nearly reached $150 a barrel, then plunged to $33 before rising to about $70 in recent weeks. Even as oil prices climbed this year, there were questions as to why because demand is still weak and inventories are rising.

Speculators are defined by federal officials as those who are “non-commercial” – essentially financial investors who aren’t users or producers of those commodities, and are primarily interested in betting on the direction of prices.

Not everyone agrees that speculators need to have a lower profile, though. In a Bloomberg report, Emanual Balarie, managing director for Balarie Capital Management in Chicago, says if speculators leave the markets, it becomes less liquid and there’s weaker price discovery.

Others are skeptical that futures contracts impact supply and demand at all.

Futures-based commodity ETFs are already limited in the number of shares they can sell. If they run out, they have to apply for more with the SEC.

What the future holds and what the CFTC concludes remains to be seen. 24-7 Wall Street suggests that some funds may either be forced to close or adjust their scope to be more like a closed-end structure. We won’t really be sure what will happen until after the hearings conclude, though.

The CFTC’s hearings will include input from consumers, businesses and market participants to determine the best course of action.

Comments

[poorman:]

More disclosure and detailed information about the aggregate activity
should be very helpful. Even speculation should be related closely to supply and demand. Just wildly speculating without these curbs begins to look like "tulipmania."

Jul 09 01:54 PM