Sovereign Wealth Funds - Energy Futures Speculators?

In a little noted or reported letter requesting information about commodities speculators, Congress has asked the Commodities Futures Trade Commission for information about how other countries are speculating in U.S. oil, grain and other commodities futures markets. The letter is here.

The question is, are net oil exporters like Venezuela, Nigeria, Iran, Mexico and Saudi Arabia inflating oil prices by buying futures contracts on the New York Mercantile Exchange? Are the Sovereign Wealth funds, as they are known, trading heavily enough to inflate prices. If they are inflating prices, by how much? While Saudi Arabia and other OPEC countries are making nice noises about the need to take speculators out of the oil markets, they may at the same time be lining their pockets with inflated oil revenues caused by their own speculative activities. John D. Dingell (D-MI), chairman of the House Committee on Energy and Commerce, and Bart Stupak (D-MI), chairman of the Subcommittee on Oversight and Investigation, asked the CFTC to:

Please provide a list of Sovereign Wealth Funds that have commodity investments including: a. An estimate of the open intererst in futures and options held by Sovereign Wealth Funds. b. How many Sovereign Wealth Funds from countries that are net exporters of oil are taking positions in oil or other energy futures? c. In the event that CFTC does not have sufficient information to assess the size and extent of these investments, please issue a Special Call for information to obtain a list of the Sovereign Wealth Funds, identify their aggregate positions in commodities, and make this aggregated information public.

Congress asked for a report by June 20, but the CFTC told a Congressional hearing Monday that the agency would have the information by Sept. 15. Read the whole letter. It's a very interesting discussion of speculation in the futures markets.

Comments

[buyitcheap]

Good! It's an easy step to use the funds from oil sales to jack the futures prices up and create a false demand premium. And the SWFs have the ability to do it.

[syndicat]

Here we are 35 years after the 1973 Arab Oil Embargo.

No energy strategy, importing more oil than ever before, driving gas guzzlers at the raised 75 mph speed limit, drinking French Alps water from a disposable plastic bottle, in a country that has trashed its currency.

Let's blame the speculators.

[MuddlingInvestor]

Well, if they really do it (as I guessed not long ago), it's a wash sale pure and simple. SWF is owned by country government, and countries mentioned have nationalized oil companies.

[ardano]

As Masters said at this hearing...and I saw the whole hearing...commodities/... are NOT capital markets. Therefore, the large commercial interests, global interests in this case, always exert undue influence on trading and therefore price. Beyond that the hearing itself dealt with institutional speculators, but not what those of us who read alpha would consider speculators. Any institution, (pension fund, etc.) who uses the Goldman Sachs Commodity Index, for exposure to commodities does the entire system a dis-service. I say this because the Goldman Sachs Commodity Index, (GSCI,) is a LONG ONLY index. This makes no sense in commodities. Being "long" the CSCI is the ultimate in dumb money, since the GSCI does not expose an institution to the short side of a transaction. Many management options "replicate" the GSCI and charge a management fee to track it.

IF pension funds/institutional investors had to speculate the way alpha readers speculate, there would be no problem. I say this because the allocation would itself be hedged and the bias towards high price would be limited due to risk calculations.

The best way to deal with the manipulation debate is to force ALL investors to assume the same risk...long and short...then devise strategies to limit the inherent risk. The very same institutional investors, defined as index fund speculators, would then use their capital to provide liquidity on both sides of the market.

The commodities markets do not suffer from too much speculation. Instead they suffer from too much speculation on one side of the trade. Make the speculators play long and short and the problem goes away.

Why is it that Masters, Soros, and all the other so-called experts never mentioned this concept.

I call on alpha readers to tell me if I'm right.

best to all during these difficult times,

rr

[Donald E.L. Johnson]

ardano,
Many of the participants in the CFTC's April 22 roundtable discussion of problems in the ag futures markets agree with you. They believe that one-sided trading by index funds has inflated ag prices and widened the basis, making convergence of futures and cash prices at contract expiration impossible. They called on the CFTC to increase the visibility of trading by the index and other institutional speculators and to classify them as speculators, not hedgers.

Read Kundra, the cotton merchants and the corn and bean growers' testimony here:

www.cftc.gov/newsroom/...

[nova]

Microsoft, Apple, Google, etc., have rights to price their product as they like.

I think energy producing countries have the same rights to price their products as they like.

The market system will balance the prices. It is that simple.