By Brad Zigler
Democrats in the U.S. Senate are looking beyond a summer gasoline tax holiday to focus on broader oil market fundamentals. Yesterday, Senate Majority leader Harry Reid [D-Nev.] unveiled the Consumer-First Energy Act, which calls for a revocation of tax breaks to big oil companies, a windfall profit tax and a cap on additions to the government's Strategic Petroleum Reserve.
Included in the bill is a diktat to the Commodity Futures Trading Commission [CFTC] to substantially raise margin requirements for oil futures. That measure, say the bill's sponsors, would discourage excessive speculation which is blamed for fueling oil's meteoric price trajectory.
While corporate flacks at ExxonMobil and BP went into overdrive to deride the bill's tax provisions, the New York Mercantile Exchange took issue with the margin mandate.
Setting onerous margins would be counterproductive, says the exchange, for a number of reasons, not the least of which would be driving trading volume away from the NYMEX to "dark unregulated venues" and opaque offshore markets. Besides, says the bourse, speculators (read: "large non-commercial participants") haven't been that much of a factor in the current crude oil price run-up.
According to a NYMEX statement released yesterday, "The percentage of open interest in NYMEX crude oil futures held by non-commercial participants (relative to commercial participants) actually decreased over the last year even at the same time that prices were increasing."
NYMEX is disingenuous when it makes such a sweeping statement. According to the CFTC, noncommercials' net long position has risen since May 1, 2007, from 3.4% of crude oil open interest to 4.5%. At the same time, the net short exposure of commercial accounts (hedgers) rose from 3.2% to 3.9%. The market has, in reality, become "longer" because of speculators.
NYMEX Crude Oil Open Interest
That played out this week in a 10% surge in crude oil's price. Refining products gained on the week as well, but to a lesser extent. Both heating and unleaded gasoline futures were 9.2% higher for the seven-day period ending Wednesday.
As a result, refining margins fell to year-to-date lows. The November/December NYMEX crack spread now stands at $9.51 a barrel, or 7.8%. Margins narrowed 83 basis points (0.83%) over last week.
NYMEX Crude Oil Crack Spread