Sunday, June 01, 2008

Crying to the CFTC over Oil Speculation

From the NYT: Commodity Policies Set for Revision
The chief regulator of the nation’s commodity markets will unveil early next week a set of policy changes to address public and political concerns that market malfunctions may be contributing to rising food and energy prices.

The agency has been wrestling ... over ... demands that it examine the role that new financial investors are having in the futures markets, especially those who are investing through commodity index funds.

Unlike traditional commodity investors ... these index funds do not both buy and sell commodity futures — they only buy, reflecting investors’ desire for a stake in a rising market.

That lopsided trading pattern has generated complaints
My comments: US leadership is obviously looking for a quick fix rather than examining and acknowledging the supply and demand concerns. After all, they wouldn't want anyone buying goods (on paper or not) and pushing the price up for the masses. That would disrupt their electability and their view of the delusional utopia.
As commodity prices have risen over the last several years, these funds have become an increasingly large player in the commodity futures markets, rising from a stake of roughly $13 billion in 2003 to an estimated $250 billion this year.
My comments: It would be nice if someone included what portion was devoted to oil. I've now seen these numbers in NYT, BusinessWeek and at least one other publication. The point is; as the world's consumption explodes are all these "speculators" wrong to chase rising oil? If there is an underlying asset with value, is it really speculating? When oil futures contracts are trading higher into the indefinite future (in contango), is buying oil speculating? I don't know, but here is something to consider....

The world consumes more than 80M barrels of oil per day. At the current price that is about $8B. Using the $250B figure above (which is obviously wrong) that yields 31 days of oil. The next best figure is in Michael Master's testimony to the senate. He says over the same period of time the demand for oil by speculators was 848M barrels. Enough to quench the world's thirst for a little over 10 days. OK, so let's stay on this road and blame the speculators...where did their oil go? They demanded the same increase in oil as China (according to Masters). Surely they must have it stored in tanks under Manhattan?

Of course not, their money is in money on paper. Since you can't write contracts on something that doesn't exist...the speculators are indefinitely "rolling over" their money into oil contracts for a future delivery - sometimes years into the future. A "virtual hoarding" of "future" oil perhaps, but based on the reality of today. At some point every "speculating" oil fund must either sell it's futures or take delivery of oil. As I have yet to hear stories of oil trucks unloading on Wall St., I must assume the "speculators" have had no trouble unloading their contracts to actual oil consumers, at actual oil prices...whatever that may be. The point is, if oil funds suddenly faced delivery of a few thousand barrels of oil, they would; 1. Cut the price in a hurry to unload the oil 2. Consider the wisdom of investments in new oil futures. Neither of those two things are happening or will happen till the global demand wanes.

Therefore, you'll have to excuse me for thinking speculation is not playing that large of a role in the world's oil price. This trivial witch-hunt - along with the "big oil" witch hunt - only underscores the fundamental problems that government has been unable to acknowledge. Simply, they are unwilling to acknowledge and deliver the bad news that the U.S. is addicted to cheap energy.

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