Wikinvest Wire

Reining in the oil speculators

Tuesday, July 07, 2009

It looks as though the Commodity Futures Trading Commission will propose new rules today to rein in speculators in commodity markets so as to prevent a repeat of last year's surge in crude oil prices that, almost exactly one year ago, saw prices peak at almost $150 a barrel.

The Washington Post provides the following details:

The move aims to reduce the volatility of prices but faces resistance from top Wall Street firms, which fear the efforts could cut into profits. Regulators and lawmakers increasingly worry that these firms have used their size and power to inflate the prices of commodities, booking profits in the process.

Concern over such deal-making reached a fever pitch last summer, when oil prices were sky high and people were feeling pain at the gas pump. CFTC data showed last year that a significant amount of trading in oil was concentrated in the hands of just a few speculators. These worries have waned since then, as gas prices have moderated from last year's highs, though a recent run-up in fuel prices may prompt new questions.
With any new heavy-handed regulation, the laws of unintended consequences will quickly come into play as there is a very real (and very understandable) interest by a growing number of investors to exchange their paper money for something more tangible.

While a futures contract via a commodity index fund or ETF is just a paper claim on some commodity, it is, nonetheless, a claim on something that is not so easily produced as the many other "paper" investments available today.

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Dan said...

The sad fact is, when it comes to "reigning in speculators", that the exchange seems to only want to take action when a commodity moves "too much" to the upside. They seem to be quite blind when it comes to markets which have concentrated shorts (silver, gold).

Simply enforcing speculative position limits would go a long way toward reigning in speculation or manipulation with no new laws or bureaucratic mess required.

Anonymous said...

Commodities are real, but futures are just promises to pay. Buying gold is not the same as buying a gold futures contract. The gold will still be in your storage vault regardless of world business circumstances. Gold futures contracts may become worthless if the people who issued the contract cannot pay off if the trade goes against them.

The futures market would have basically ended recently without taxpayer bailout of selected futures issuers. Is the taxpayer really willing to continue these expensive bailouts? Will AIG et al really be allowed to continue to issue futures that they have no ability to pay out on?

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