The Washington Post says the scale of speculative activity in commodities markets is larger than previous estimates indicated:
A Few Speculators Dominate Vast Market for Oil Trading, by David Cho, Washington Post: Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.
But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator... Even more surprising ... was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.
The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. ...
Some lawmakers have blamed these firms for the volatility of oil prices... "It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). ...
Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.
CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets...
Many people have said that recent price movements make it clear a speculative bubble in the commodity markets has popped. I can't add my voice to that exact wording.
The term "bubble" has become watered down with popular usage in the press and elsewhere, but technically a speculative bubble is the result of price movements that are divorced from the underlying fundamentals (as with housing). Yet the stories I hear for oil price and other commodity movements mostly involve fundamental factors.
Let me say this another way. I've also heard that it can't be supply and demand that's pushing prices around. But even if there's a speculative bubble or market manipulation, it's still movements in demand and supply that are pushing prices around. Demand skyrockets (or plunges in a crash), or perhaps supply is artificially constrained - it's just that the demand shifts are driven by non-fundamental factors. Supply and demand are still at work. It's simply a question of what is driving the shifts in the supply and demand curves - fundamentals or something else?
It's possible for the underlying fundamentals to shift quickly. The possibility of, say, a war can change very fast altering the outlook for future supplies and when it does prices will change along with the change in the outlook, as they should. But that is not a bubble popping, that is a fundamental driving the price around. Big swings in fundamental factors that cause big swings in expected future supply or demand (and hence affect supply and demand today) can cause big swings in the price, and it can happen relatively fast.
I have yet to be convinced that the big swings in prices we have seen are due to prices departing from the underlying fundamental factors and then returning, i.e. that the price swing is from a speculative bubble in the technical sense (or maybe we are simply debating what we can count as a fundamental fundamental factor, but a technical bubble is still something different).
I don't deny, and never have, that speculation is at work in moving prices around, I've drawn diagrams in the past showing how a change in expected future conditions can change today's price. But I agree with the article, I just don't see the evidence of outright, intentional manipulation of the price. Holding large shares, or seeing large volumes alone are not enough to make that case, and it's hard for me to believe that manipulation alone can explain the size of the swings in price that have occurred in commodity markets. I also don't see the case for a more traditional speculative bubble (i.e. a price change driven by a departure from fundamentals rather than manipulation), but as I've said all along, this is hard to prove one way or the other and there could be some of this at work.
So maybe there was some manipulation attempts, I don't know, but if the evidence was strong we would have heard about it. And maybe there has been some departure from fundamentals. Again, it's hard to know with any certainty, but I still believe the majority of the price movements can, in fact, be explained by fundamentals as defined above.
I could be wrong, maybe there has been manipulation, or perhaps we've seen a more traditional speculative bubble, again in the technical sense, but so far I haven't seen enough evidence to be convinced that this is a better explanation for the preponderance of price movements than shifts in supply and demand driven by underlying fundamentals.
But that doesn't mean we shouldn't keep investigating to see if the claim of no manipulation holds up against additional scrutiny, or if there is evidence for a more traditional type of speculative bubble.
