U.S. Considers Curbs on Speculative Trading of Oil

[TheSteve]

http://img.photobucket.com/albums/v615/TheSteve412/08cftc600.jpg

WASHINGTON — Reacting to swings in oil prices in recent months, federal regulators announced on Tuesday that they were considering trading restrictions on hedge funds and other “speculative” traders in markets for oil, natural gas and other energy products.
In a big departure from the hands-off approach to market regulation of the last two decades, the chairman of the Commodity Futures Trading Commission (http://topics.nytimes.com/top/reference/timestopics/organizations/c/commodity_futures_trading_commission/index.html?inline=nyt-org), Gary Gensler (http://topics.nytimes.com/top/reference/timestopics/people/g/gary_g_gensler/index.html?inline=nyt-per), said his agency would consider new limits on the volume of energy futures contracts that purely financial investors would be allowed to hold.
The agency also announced that it would pull back part of the veil on the oil and gas markets, publishing more detailed information about the aggregate activity of hedge funds and traders who arbitrage between domestic and foreign energy prices.
“My firm belief is that we must aggressively use all existing authorities to ensure market integrity,” Mr. Gensler said in a written statement (http://www.cftc.gov/stellent/groups/public/@newsroom/documents/pressrelease/genslerstatement070709.pdf).
Mr. Gensler announced that his agency will hold several hearings in July and August, the first of which will examine whether to impose federal “speculative limits” on futures contracts for energy products.
Oil prices have swung wildly in the last year, hitting about $145 a barrel last summer, then plunging to $33 in December before rising to about $70.
Much of that gyration stemmed from chaos in the global financial system, as banks and much of Wall Street came perilously close to collapse last September and the global economy fell into the most severe recession in decades.
But a growing number of critics have blamed some of the extreme volatility on the role of purely financial investors — those who are simply betting on the direction of energy prices, as opposed to those who actually use such products, like airlines.
The Commodity Futures Trading Commission, an independent regulatory agency that regulates the trading of futures contracts for commodities ranging from wheat and corn to oil, precious metals and currencies, has for years followed a deregulatory path that rarely interfered with the burgeoning markets they regulated.
Federal officials said “speculative” traders were primarily those that the agency defines as “non-commercial,” which are essentially financial investors who are not users or producers of the commodities and are primarily interested in betting on the direction of prices. “Commercial users,” by contrast, include farmers, airlines and oil companies that want to hedge against the risk of rapid price changes.
Non-commercial traders accounted for almost a fifth of the activity in several major oil and gas products for the week that ended June 30, according to data compiled by the commodities agency.
Mr. Gensler, who was nominated by President Obama (http://topics.nytimes.com/top/reference/timestopics/people/o/barack_obama/index.html?inline=nyt-per) and took over the agency earlier this year, made it clear that he is pushing toward tighter regulation on several fronts. His efforts mirror actions taken by the Justice Department to strengthen antitrust enforcement and by financial regulators to police banks and investment firms much more closely.
Mr. Gensler noted that his agency already imposes volume limits on speculative trading in agricultural products like wheat and corn. But in the case of energy products, the agency allows the futures exchanges — primarily the New York Mercantile Exchange (http://topics.nytimes.com/top/reference/timestopics/organizations/n/new_york_mercantile_exchange/index.html?inline=nyt-org) — to set limits.
A future is a contract to buy or to sell a particular volume of a commodity by a particular date. Futures contracts were originally created to help farmers shield themselves from price volatility between the time they planted their crops and the time of harvest. But futures are now used to hedge price swings in everything from oil and gas to electricity, Treasury bonds (http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/treasury_securities/index.html?inline=nyt-classifier) and foreign currencies.
In the case of energy products, Mr. Gensler said, the exchanges were not required to set or enforce position limits aimed at preventing “excessive speculation.” The contrast between approaches taken for agricultural and energy commodities, he said, “deserves thoughtful review.”
Mr. Gensler added that the agency would be reviewing the manner in which traders receive exemptions from trading limits by claiming the need to carry out “bona fide hedging transactions.”http://www.nytimes.com/2009/07/08/business/08cftc.html?partner=rss&emc=rss&src=igw

This seems to make sense, I never understood why the energy market should fluctuate so much just because of speculation. This seems like a no-brainer to me, but Im not well informed on how these markets work.

[MaverickCowboy]

I think i approve of this. speculaters causing the oil crisis sho be shot. while did gas have to jump to $5.00/gal for no reason?

[CMNot]

So some other ****ers could make a bucket of cash off our inconvenience. It's alright though, they didn't get their white collars as dirty as the mortgage crowd.

[bono]

http://img.photobucket.com/albums/v615/TheSteve412/08cftc600.jpg
http://www.nytimes.com/2009/07/08/business/08cftc.html?partner=rss&emc=rss&src=igw

This seems to make sense, I never understood why the energy market should fluctuate so much just because of speculation. This seems like a no-brainer to me, but Im not well informed on how these markets work.

The basics of trading are very simple. There is supposed to be a regulated market where and where only legal buy sell contracts can be entered into. A commodity exchange buys/sells commodities (against future deliveries thus called futures) and stock exchange buys/sells paper assets like shares/bonds. Electronic exchanges (NASDAQ) are same except that people sitting in front of monitors go through brokers' computer systems to execute their trades.

Since buying selling of these assets can only be done by a few licensed brokers in a legal exchange, it follows that only a few people are dealing in huge volume of commodities or stocks/bonds. This leads to the problem of "cornering the market". An aggressive broker can start buying up attractive stocks/commodity futures, or shares in a company, leading to shortage of these commodity futures contracts or availability of shares on the exchange, eventually leading to rise in the price of these commodities in subsequent trades (demand high supply low).

To guard against these "corner the market" moves by aggressive brokers (or group of brokers), there are strict position limit rules on most exchanges in the world. This means that a broker's "position" is strictly monitored by the exchange, meaning they will keep close eye on his buys and sells. If someone has a very high buy on a given stock or commodity, thats a red flag. Simple commonsense as anyone would say.

However, enter the Commodity Futures Modernization Act of 2000, this so called "modernization" act went against the very basis of fair trading. This website (http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Oil_Speculation/oil_speculation.HTM)says this:

"The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders "

At over the counter exchange (OTC, meaning electronic exchange) such as Intercontinental Exchange (ICE), pension funds, and other speculators went all the way last year, buying up oil futures, thus leading to huge shortage of oil future contracts (not actual oil). There were no position limits because there was no oversight. A speculator, alone or working with a group could buy up all the oil contracts entering the market, thereby decreasing the availability of oil contracts demanded by actual uses of oil such as refineries. The nice thing about commodity futures is that if you buy an oil future and sell an oil future for same amount of oil, you never have to take actual delivery because they cancel each other out. These speculators would buy up every available oil contract (known as "paper oil", 1000's times more than actual oil available), but never take delivery because just before the maturity date they would sell just enough to offset their position.

Thus while grandpa's pension fund made tons of money, mom and pop had to cutback on food just so that they could pay for gas to go work.

[Kilgor]

http://www.rollingstone.com/politics/story/28816321/the_great_american_bubble_machine/1

The Rolling stone article on Goldman Sachs is well worth the read.

[Panchito12]

This seems to make sense.

One side will scream: Tortious interference with prospective economic advantage.

I would scream: If we can regulate other utilities (water, electricity, etc.) why not gas?


But regulate without subsidies.

[Flagg]

I view these develops wearing a darker shade of sunglasses on.

I view curbs on "speculation" as efforts to put as much drag on inflation induced commodity price rises going forward.

By cutting "speculation" off at the knees it funnels money into fewer options....options in the best interest of government that MUST be inflated at ALL costs....like equities, real estate, and bonds.

It's also worth mentioning "shorting", where investors bet their capital that equity values will drop.

By eliminating drag on equities, they're more likely to rise, trade sideways, or fall less.

Combine efforts to reduce commodity investment, with efforts to inflate equities, with both overt and covert direct market intervention by government equals a heavily manipulated investment environment where politics carries more weight than market reality.

I believe strongly that commodities are going to fly due to inflation going forward, hence efforts that will ultimately fail to try and curb them.

I believe strongly that equity, real estate, and bond markets are going to continue to get thrashed in real(if not nominal) terms going forward, hence efforts that will ultimately fail to support them.

People b!tch and moan about "evil oil speculator fat cats!"

Doesn't Joe 6 Pack, whose 401K/pension/investment, property, cash savings are being destroyed by the biggest financial hurricane in several generations have the right to protect his/her capital from destruction?

If you put your money in property you get fried by the credit crisis.

If you put money in shares you get fried by the equity market implosion.

If you put money in bonds you get smoked when the US government destroys 200 years of contract law by fcuking you over.

If you sit on cash, government chases it out of banks with low interest rates, and attrits it with inflation.

If you decide that the only way to preserve(forget about growing in real terms) your capital to fight another day when the dust settles is to invest in "stuff" that cannot be inflated by government....you are an evil speculator.

Citizens are being treated like stupid sheep....and unfortunately, in many cases it's all too true.

A couple "evil speculators" are fingered to satiate the masses....when in reality the folks pointing the fingers are shearing the sh!t out of them.

The current and likely short-to-medium term future environment is simply a question of choosing the "least bad" option....that's about as good as it gets.

[ZeroZen]

I favor it be regulated. Its to much money in oil trading to be speculated just for instant profit. I wonder much of the stimulus money went through this game of chances market playing on when will the economy recover. They need to flush some cash out of the hedge funds into viable businesses that creates jobs and opportunities.

[TheSteve]

One side will scream: Tortious interference with prospective economic advantage.

I would scream: If we can regulate other utilities (water, electricity, etc.) why not gas?

Agreed.



But regulate without subsidies.
I'm not all too familiar with every state, but here in Florida water is ungodly cheap, even though we are constantly in a shortage. The utility companies get vast sums of money from the State, eventually I think the consumer will just have to pay up though. I agree with alleviating costs, but not though subsidies. Why use a middleman?

While traveling in Europe this summer I was always reminded by people to turn off the water or don't use as much, which is something you don't hear back in the states, because it has a realistic price.

[Violet Fashion by Mindy]

So much for supply and demand being the cause of the price of gas!

[Macs.]

While traveling in Europe this summer I was always reminded by people to turn off the water or don't use as much, which is something you don't hear back in the states, because it has a realistic price.

Water isn't really expensive here.

Did you maybe think about that it's not because it's "expensive" but because it's simply a good thing to use something such as water with a brain instead of wasting it ?

[TheSteve]

Water isn't really expensive here.

Did you maybe think about that it's not because it's "expensive" but because it's simply a good thing to use something such as water with a brain instead of wasting it ?
No, if its cheap just use as much as you can.

People generally care more about conservation if its not unrealistically cheap, of course you should use water with a brain, but that doesn't mean people do.

[Flagg]

So much for supply and demand being the cause of the price of gas!

Ultimately, it is.......

Anyone in the herd happy to laugh with glee at seeing a few tall poppy "speculators" getting smashed is failing to see the big picture.

It's like laughing at a kid with a nice new bicycle fall and scrape his knee....meanwhile there's a cement truck you fail to see(due to a lack of situational awareness) in your peripheral vision about to flatten you.

Enjoy laughing at the expense of others while you can...while it may feel good for the moment.....there's going to be a fairly substantial price to pay for the entertainment.

[Violet Fashion by Mindy]

How so?

I mean don't you think it's quite absurd that say a bank can buy 5 million dollars of oil, hold onto it and sell it when prices are high?

In effect they are restricting supply and preventing industries that do actually need the stuff from sourcing cheap oil, thus increasing the cost of oil based products to the consumer. What good is it when a bank owns 5 million barrels of oil that is simply sitting in storage tanks in the Middle East waiting for the price to reap maximum profits?

Artificially restricting demand which causes prices to rise would cause more inflationary pressures then having regulation which restrict speculation. I agree that some speculation is needed since it does allow investment in new business which creates jobs, which means more spending, which creates more business and so on. BUT the level of speculating that has gone on in the last 20 years is crazy.

Personally the entire economic model that the world operates on is broken. It's out of date and some major reforms need to take place. But that's for another day.

[akd]

Why just oil?

[Kilgor]

How so?

I mean don't you think it's quite absurd that say a bank can buy 5 million dollars of oil, hold onto it and sell it when prices are high?



And this is exactly what they are doing. There is a major tanker shortage. They are being filled up full of oil and being used as floating storage tanks for when the price is right.

[Violet Fashion by Mindy]

Because Oil has the best chance to fluctuate in price the most in a short space of time. Other commodities have stable price changes. Oil can take a dump overnight and within a week be worth more then gold.

[sinophile]

If all they do is make the market more transparent... great. If they start trying to control trades or prices they're going to regret it just as every govt. has regretted what amounts to price fixing. Part of the reason oil is so volatile is because its thinly traded relative to other commodities, and especially relative to its economic impact. If they want to control volatility they'll need more than transparency. They're going to need to add market liquidity.

[Flagg]

How so?

I mean don't you think it's quite absurd that say a bank can buy 5 million dollars of oil, hold onto it and sell it when prices are high?

Why not? 5 million dollars is chump change. When it comes to currencies(which energy is quickly becoming one fo them), TRILLIONS of dollars worth...are traded EACH business day.


In effect they are restricting supply and preventing industries that do actually need the stuff from sourcing cheap oil, thus increasing the cost of oil based products to the consumer. What good is it when a bank owns 5 million barrels of oil that is simply sitting in storage tanks in the Middle East waiting for the price to reap maximum profits?

Businesses around the world hedge currencies for import/export. Businesses around the world hedge energy prices to more accurately project their financial performance and smooth overheads.

Do you have any idea HOW MUCH it costs to store/transport oil?

Holding Costs can be staggering.

Artificially restricting demand which causes prices to rise

artifically restricting demand causes prices to RISE? eh?

would cause more inflationary pressures then having regulation which restrict speculation. I agree that some speculation is needed since it does allow investment in new business which creates jobs, which means more spending, which creates more business and so on. BUT the level of speculating that has gone on in the last 20 years is crazy.

Personally the entire economic model that the world operates on is broken. It's out of date and some major reforms need to take place. But that's for another day.

You believe in freedom right?

How about the freedom for a person to say," Government is INTENTIONALLY ripping me off! Beyond direct/indirect taxation which is required for an orderly functioning society, government taxes me via inflation, and government tries to channel what little I have left to the sharks. I have a moral RIGHT to try an protect what I have left. Government cannot print oil, but it can print bits of paper it obviously prefers I own instead of oil to protect what little capital I have."

Energy is money....money is energy.....money is sometimes bits of paper........bits of paper are not always money.

[Flagg]

Because Oil has the best chance to fluctuate in price the most in a short space of time. Other commodities have stable price changes. Oil can take a dump overnight and within a week be worth more then gold.

Are you stating that as FACT?

Ever heard of the expressions "limit up" or "limit down"?

[Flagg]

If all they do is make the market more transparent... great. If they start trying to control trades or prices they're going to regret it just as every govt. has regretted what amounts to price fixing. Part of the reason oil is so volatile is because its thinly traded relative to other commodities, and especially relative to its economic impact. If they want to control volatility they'll need more than transparency. They're going to need to add market liquidity.

I agree about liquidity...especially since oil is likely to play a critical role in a future global currency/commodity basket.

I don't see why they don't simply reduce(but not eliminate) price volatility by making potentially big adjustments over time in regards to margin requirements and leverage limits.

If "evil speculators" are really the bulk of the problem, dramatically raising their margin requirements, dramatically lowering leverage limits would require them to front up dramatically more real cash.

And if people still have a problem with someone who fronts up their own cash(or the bulk of it) to purchase oil in hopes of selling it later for more than they paid then people have a problem with commerce as practiced for thousands of years.

[Ritual]

Waiting for demand to exceed possible production, it will be a rude awakening for many a people.

[bono]

I agree about liquidity...especially since oil is likely to play a critical role in a future global currency/commodity basket.

I don't see why they don't simply reduce(but not eliminate) price volatility by making potentially big adjustments over time in regards to margin requirements and leverage limits.

If "evil speculators" are really the bulk of the problem, dramatically raising their margin requirements, dramatically lowering leverage limits would require them to front up dramatically more real cash.

And if people still have a problem with someone who fronts up their own cash(or the bulk of it) to purchase oil in hopes of selling it later for more than they paid then people have a problem with commerce as practiced for thousands of years.


Do you even have a clue what you're talking about. Commodity exchange brokers are not 3000$/ month cubicle farm serfs. They do not trade on margins like day trading jockeys. They always work with "real cash". Also, cornering the market is not your typical "buy low sell high". Its got to do with eliminating all competition so there are very few buy contracts left for legitimate buyers. This leads to shortage of contracts and massive increase in price of left over contracts, while the product is overflowing in storage with no shortage. Product is not gonna move till someone takes deliveries. Legit traders cannot tke deliveries because cartels at ICE are buying selling contracts to each other shutting out legit buyers.

Spare us your half-baked undergraduate expertise and go read about the notorious ICE commodities exchange and its role in artificially inflating oil prices.

[Flagg]

Do you even have a clue what you're talking about. Commodity exchange brokers are not 3000$/ month cubicle farm serfs. They do not trade on margins like day trading jockeys. They always work with "real cash". Also, cornering the market is not your typical "buy low sell high". Its got to do with eliminating all competition so there are very few buy contracts left for legitimate buyers. This leads to shortage of contracts and massive increase in price of left over contracts, while the product is overflowing in storage with no shortage. Product is not gonna move till someone takes deliveries. Legit traders cannot tke deliveries because cartels at ICE are buying selling contracts to each other shutting out legit buyers.

Spare us your half-baked undergraduate expertise and go read about the notorious ICE commodities exchange and its role in artificially inflating oil prices.

You mention "real cash".

So everyone's cashed up to face value on all those energy derivatives?

Studying at Wharton didn't really prepare me for this cr@ptastic mess......undergrad Political Science has been far more relevant these past few years.

How is this NOT blatant political manipulation to scare money out of commodities?

How is this NOT a message to anyone running away from the dollar(pound) and towards oil as a safe haven currency that government will do ANYTHING to protect it's own currency and fcuk anyone who tries to preserve their capital?

There are some pretty sharp people sitting mostly in Treasuries trying to figure out how to turn those US Dollars into oil dollars.

From here, the lower oil goes, the bigger the buyer I WOULD be....to my LAST penny.....as a barrel of oil in the $50's is a far safer bet than the equivalent US Dollars.

But how exactly?

What effect will these potentially very real threat to "regulate", but really manipulate, markets have?

The US/UK/EU are attacking Switzerland to scare the money out towards propping up New York and The City .

Just as government is attacking speculators to scare money out of commodity markets and towards propping up sagging equities, real estate, and bonds.

So instead of making condescending comments about "undergraduate expertise" maybe open your eyes and consider taking a broader perspective.

[sinophile]

The US/UK/EU are attacking Switzerland to scare the money out towards propping up New York and The City .

Interested... I was thinking the same thing. USGOV is very eager to get overseas dollars repatriated. I guess I see 3 benefits:

1. They want the tax revenue.
2. They want greater control over dollar supply (reduce eurodollar liquidity).
3. They actually need the dollars.

It can't be fairness because they've looked the other way for decades. Something obviously made them decide to pay attention to something they should have corrected a long time ago.

[Flagg]

Interested... I was thinking the same thing. USGOV is very eager to get overseas dollars repatriated. I guess I see 3 benefits:

1. They want the tax revenue.
2. They want greater control over dollar supply (reduce eurodollar liquidity).
3. They actually need the dollars.

It can't be fairness because they've looked the other way for decades. Something obviously made them decide to pay attention to something they should have corrected a long time ago.

While the tax evasion issue is real.......it's small potatoes in the big picture.

The REAL MONEY(not debt of myriad flavours) that resides in Switzerland is SUBSTANTIAL.

The US/UK as well as German/French centres of financial gravity NEED to flush the money out.

Cash on a banks balance sheet is always better than government loaned debt.

Have you noticed the complete lack of concern or even MENTION about Dubai or Kong Kong?

Why do the Swiss get both barrels in the face?

If this REALLY was about dirty money, Dubai and Kong Kong would be on the radar...but they're not...so it's political.

Switzerland doesn't have oil currency, a UN Security Council Veto, or trillions in IOUs...all three are economic warfare WMDs...Switzerland doesn't have any.

So efforts will continue to reduce Switzerland as a banking centre, to specifically benefit US/UK and to a lesser extent Germany and France....whether they will be successful or not, I don't know.

What I do know is that opening an account in Switzerland specifically to avoid paying taxes is possible......but it's far, far easier elsewhere.

This is all just my opinion.

What is FACT is that the attack on Swiss banking is true, but the reasons why it's being attacked are false.

Economic freedom is on the line...we are seeing the first signs of the return of capital controls.

Both with Switzerland and with commodity market "regulation" of "speculation".

Not good for freedom of any kind.

[Violet Fashion by Mindy]

BUT the free market has not really been working to well now has it?

:)