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CFTC Report on High Oil Prices - "Speculation My A$$"
Posted by Nate Hagens on July 23, 2008 - 11:00am
Topic: Economics/Finance
Tags: cftc, commodities, george soros, michael masters, oil prices, original, speculation [list all tags]
| With a pending Senate vote on the "Stop Excessive Energy Speculation Act", it seems that we (not the TOD 'we', but the collective society 'we') continue the ongoing witch hunt to pinpoint any 'explanation' for our high oil and gas prices that is not related to finite geologic flow limits or Malthusian themes (i.e. benign). Greedy oil companies, dastardly OPEC plots, and off-limits drilling of the Arctic National Wildlife Reserve and Outer Continental Shelf are among the reasons oft floated in the conventional media for why oil has risen in price over 10 fold in the last decade. Yesterday, a report from a credible institution was released detailing why at least one of the high oil price bogeymen, 'the speculators', are not to blame. In this report, the Commodity Futures Trading Commission (CFTC), threw cold water on the recent rhetoric in Congressional testimonies and television commentary that high oil prices are primarily caused by investment speculators. |
Excerpt from Figure 1 from CFTC Interim Report on Crude Oil - Click to Enlarge
This is a long and detailed report, with many graphs and data supportive of a)the tightness in global supply and demand for oil and b)the lack of correlation between speculative positioning and price increase. It is worth a complete read for those interested in this issue (which has seemed front and center in many CNBC debates on oil speculation). Below are some excerpts of the main findings of the report (italics/bold added).
From the Executive Summary:
The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly. While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.
Figure 2 - Oil Intensity and Use by Country Click to Enlarge
The world economy has expanded at its fastest pace in decades, and that strong growth has translated into substantial increases in the demand for oil, particularly from emerging market countries. On the supply side, the production of oil has responded sluggishly, compounded by production shortfalls associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in the short term, very large price increases have occurred as the market balances supply and demand.
If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based on the evidence available to date, suggests that changes in futures market participation by speculators have not systematically preceded price changes. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.
This conclusion was discussed here in a post on Peak Oil and Reflexivity following George Soros and Michael Masters testimonies before Congress. In effect, at the end of trending cycles the tail eventually wags the dog. This can be seen in real time in energy stocks (down already 30% from their highs in the last month with oil still 'only' at $126).
More from the CFTC report:
On the demand side, world economic activity has expanded at close to 5 percent per year since 2004, marking the strongest performance in two decades. Between 2004 and 2007, global oil consumption grew by 3.9 percent, driven largely by rising demand in emerging markets that are both growing rapidly and shifting toward oil-intensive activities. Moreover, some of the fastest growing nations also rely on price subsidies that hold down the prices of oil and refined products such as gasoline, which further boosts oil consumption.
Figure 1 Click to Enlarge
While global demand has proven strong, oil production growth has not kept pace. In the past three years, non-OPEC production growth has slowed to levels well below historical averages, and world surplus capacity has fallen below historical norms. Preliminary inventory data also shows that Organisation for Economic Co-operation and Development (OECD) stocks have fallen below 1996-2002 levels. Moreover, supply disruptions have adversely affected both world oil production and exports.
Figure 5 - Non-OPEC Oil Supply Growth
The imbalance between scarce supply and growing demand, and expectations that this imbalance will persist in the future, have led to upward pressure on oil prices and greater market reactions to any actual or perceived disruptions in available supply. Under such tight market conditions, it is often the case that only large price increases can re-establish equilibrium between supply and demand. Consequently, large or rapid movements in oil prices are not inconsistent with the fundamentals of supply and demand; such price movements, by themselves, do not indicate that prices have become divorced from fundamentals. Moreover, if speculative positions, rather than fundamentals, were pushing prices upward, then inventories would be expected to rise. To date, there is no evidence of such an accumulation; in fact, known inventory levels actually have declined.
Figure 6 - Increasing Reliance on OPEC Production
Activity in crude oil futures and options contracts has been increasing since 2004. During that period, the number of contracts outstanding (known as “open interest”) has more than tripled, and the number of traders has almost doubled. The fastest growth in open interest has been recorded among non-commercial traders – often called “speculators” – holding spread positions combining long positions in one month with short positions in another month. Thus, while the long positions of non-commercial traders have increased, the short positions of non-commercial traders also have increased. Additionally, although the net long positions of non-commercial traders have increased somewhat since 2004 – which some market observers have hypothesized has pushed prices up – the proportion of those positions has been relatively constant as a share of open interest over the last few years, undercutting that hypothesis.
Much of the attention related to participants in futures markets has focused on the role of commodity index investment funds and the commodity swap dealers that often act as their intermediaries. During the period studied, January 2003 through June 2008, pension funds and other investors have increasingly used index funds as vehicles to participate in commodity markets. Some observers have suggested that this rapid inflow of investments through index funds has been a cause of oil price increases. The CFTC has issued Special Calls for data about this activity, but only partial responses have been received as of the date of publication of this interim report. An analysis of the data from these Special Calls will be made available in September.
The data currently at hand – which incorporates non-public surveillance information – includes positions held by commodity swap dealers. Commodity swap dealers offer institutional investors contracts whose returns are linked to a variety of commodity indices. Broadly speaking, after netting their index fund clients’ positions against the positions of their other clients, these dealers use futures contracts to hedge the risk remaining from this business. Thus, the activity of commodity index participants should become evident in the position changes of commodity swap dealers.
Non-public CFTC trading data shows that commodity swap dealers have held roughly balanced long and short positions in the crude oil markets over the last year and actually held a net short position over the first five months of 2008 – that is, swap dealers’ futures positions would have benefited more from price decreases than from price increases like the ones experienced in the last few months. Moreover, any pressure exerted by the long positions of swap dealers’ commodity index clients has largely been offset by the short positions of the dealers’ other clients.
The Task Force’s preliminary analysis also suggests that changes in the positions of swap dealers and non-commercial traders most often followed price changes. This result does not support the hypothesis that the activity of these groups is driving prices higher. The Task Force has found that the activity of market participants often described as “speculators” has not resulted in systematic changes in price over the last five and a half years. On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market. In particular, the positions of hedge funds appear to have moved inversely with the preceding price changes, suggesting instead that their positions might have provided a buffer against volatility-inducing shocks.
From the reports concluding remarks:
Observed increases in the speculative activity and the number of traders in the crude oil futures market do not appear to have systematically affected prices. Moreover, if speculative activity has pushed oil prices above the levels consistent with physical supply and demand, increases in inventories should emerge as higher prices reduce consumption and investment in productive capacity is encouraged. Although this process may take time to unfold, inventories of crude oil and petroleum products, according to available data, have declined significantly over the past year. The view that financial investors have pushed prices above fundamental values is also difficult to square with the fact that prices for other commodities that do not trade on established futures markets (such as coal, steel, and onions) have risen sharply as well.
OK, at least based on this preliminary report, speculators are not the primary culprit behind high oil prices. Clearly SOME % of oils rise is due to speculators, in the same vein that some rise in corn, live hogs and SP500 is due to speculation - in the intermediate term fundamentals will always win. The year of production peak is largely irrelevant - what matters is cheap and abundant liquid fuels to power the economic system the world has become dependent upon - for all practical purposes we are already past this point. We are likely going to continue to witness denial of this obvious but threatening theme from the Wall Street -government-OPEC trifecta. Investment analysts will claim demand destruction, governments will blame speculators and OPEC will posit that the markets remain well supplied. There will be no end to how long these parties continue to use these arguments. Every year there will be a normal 20+% correction in oil prices and confident authority figures will say that peak oil is a myth.
What is it going to take?
As a public service to the oil trader types, I have, from time to time, offered my interpretation of Yerginisms, and I coined the term "The Yergin Indicator," which suggests that oil prices will trade at about twice Yergin's predicted index price, within one to two years of his prediction. For example, about a year ago Yergin said that oil prices in (barring a geopolitical event) would be back down to $60 in 2008 (for more info, do a Google Search for Daniel Yergin Day).
Yergin has been noticeably reticent of late regarding prices, depriving traders of a critically important price trend indicator, so we have to go with secondary sources. Three talking heads were just on CNBC, and in their collective opinion, they agreed that we should be back down to $100 by the end of the year. So, I have designated a new indicator, the CNBC Consensus. While it will probably not be as powerful as the Yergin Indicator, it is probably a decent predictive tool. So, IMO, the CNBC Consensus suggests that oil prices will be closer to $200 than $100 by the end of the year.
WT, sometimes you make me laugh so hard my wife wonders.
$100 by the end of the year. That reminds me of the cartoon that you see in offices on the wall next to the photocopy machine with the guy laughing so hard he is holding his gut, saying "you want it finished by when?"
$200 per barrel if all goes well, higher if not. What was that guy Murphy saying about if something can go wrong it will. In this case there are many things that can go wrong.
We could easily be back at $100, or lower at the end of the year, and it would not invalidate any of the concepts we discuss here. We could also be at $200. Prices, as people must realize by now, have short term elasticity completely separate from long term fundamentals.
(btw, the implied vol in crude oil options suggests that seeing $100 again before year end is more likely to happen than to not happen)
I agree, Nate. I think it is good to keep in mind that most feel one of the symptoms/results of Peak is/will be extreme price volatility, as you pointed out. We need to keep in mind that demand destruction is occurring, though not yet net globally. Also, these ARE the peak production years according to Megaprojects. In late '07 some (many?) people here, including myself, were expecting some softness in price during the period through '09 or '10, no? (Of course, that was pre-Russian peak when they were responsible for something like 60 or 70% of net yearly gain in non-OPEC production.) Then there is the supposed 12.5 by '11 the KSA is claiming they'll have. Those not on board with the inevitable upward trend will take some of these things very seriously, and prices will be volatile.
Drinking the KoolAid, even if one's own (peakers), is always a bit of Russian Roulette, I think.
Cheers
I agree Nate, many of us peak-oiler's get a bit too excited when seeing price trends validate our personal models of PO. In reality, I think we will see an undulating plateau of supply with erratic price swings for several years. I view the whole price/volume system as very chaotic (in the true mathematical sense): it is extremely sensitive to minor changes and is wildly non-linear.
Has anyone considered mapping oil price as a chaotic system? I wonder if there is a strange attractor underneath this?
Lemme see.
1. The oil-producing nations would rather have higher than lower prices. 2. The oil-producing nations have huge mountains of money (sovereign funds) and expert financial advisors, and thousands of financial minion-quislings at their disposal. 3. Oil demand is inelastic in the short-run, meaning if speculators game the price up, demand does not wither for several years. 4. Any financial market can be gamed, and they have been gamed many, many times in the past.
But, oh no! No one ever manipulated the NYMEX! Never! Impossible!
Please. If I ran an oil-producing nation -- and our only real source of income was oil -- of course I would try to game the price higher. It would be a violation of fiduciary duty to my fellow citizens to NOT game the price higher.
So, we can assume oil-producing nations are gaming the price higher, through financial quislings. The gaming worked, as demand is inelastic in the short-run, defined as five years or less.
The gaming worked -- but the game has run its course. Demand is withering, in the medium-term, which we are reaching now. Automakers switching over fleets etc. Now, global demand will likely sink for several years. If prices hold long enough, then the long-term, and much greater elasticity begins to set in, bringing huge, decreases in demand.
What is fascinating is the OPEC-killer lurking in the wings. The death-ray for speculators. The GM Volt.
If such a car works commercially, it is game over for the oil boys and their minion-weenies. Who will need oil then? The world will be able to prosper at 40 mbd or less. Cities will be quieter and have cleaner air.
Tell me the downside in this, because I can't see it.
I agree that all the money sloshing around in our economic system is contributing to price volatility. But I completely disagree with any notion of a vast conspiracy or some "puppet master" that is pulling strings to consciously run up prices. The whole oil price system has lots of drivers from oil-producing states waking up to the real value of what they have in the ground, to worried investors who are starting to comprehend the house of cards that is the US economy. People in this system are like cellular automata's who are following their own interests. I think the influence by global actors like government, KSA, or even Exon Mobile is quite muted. As in calculus, all the little dx's add up, but you need to understand the underlying trends in order to add them up and make any sense of it.
As I see it, all this energy, fear, and money are racing around trying to find some stability point, yet they can't because it is a chaotic system. It keeps oscillating and chasing any hope for answers and stability... but there are no easy answers or safe havens. Climbing out of this peak oil hole will not happen easily or naturally, unless you are betting on Malthusian outcomes.
You're much more optimistic than I about the impact of the GM-Volt. I sure hope is has an impact, but I see it as too little, too late. By 2010 we're going to be in a vastly different world if we continue on current trend lines.
By 2010? Demand is falling now, but global production of liquid fuels is hitting records highs every months. Sellers of sour crude have no markets. Oil is plunging, and it may turn into a rout.
And conservation methors are just getting started.
Hi all,
Noticed a report in the Independant this morning that Nigerian "freedom fighters" were annoyed that a $6M pay off - sent by the Nigerian government had gone to criminal gangs instead of them. They promised to renew attacks on pipelines within the next 30 days as a result. I also note that the recent Iran / Eu "talks" have produced little of substance and that the US 2 week deadline to "think again" about their (Iranian) negotiating position expires shortly.
I'm sure both issues will exert some influence on fluctuating prices over the coming weeks.
I found my 6/28/07 post on The Yergin Indicator:
Jeff
Whilst we are in a creative mood i had a thought (dangerous). I thought we could improve the situation by creating a new acronym, WSD to describe an oil fields reserves, A WSD is "a World Supply Day". This has major advantages.
1/ Its is understandable by anyone, we all know what a day is, 1 billion barrels on the other hand has absolutely no 'meaning' to the general public.
2/ As consumption increases, Reserve Values Drop! 1 Billion barrels is currently 11.8 WSD, should consumption increase to 100mbpd then the reserve is 10 WSD
Imagine the press relese "ANWAR possibly contains 58.8 World Supply Days of crude!"
Its got to be better than POTUS or WOMD (Which I always confused with WOMAD)
Neven
Good Morning.
Um, this is for people like me, yes? Doesn't "WSD" sound a bit like "WMD"? But yes, I do like the idea, even though it would probably only appear on page 58 of the local rag, buried beneath the "Touched By The (Road) Toll" figures.
People don't service their washing machine; they just keep using it until it breaks down, curse it when it does and finally phone someone for help. I'm still crossing my fingers and toes that the "energy man" will have some answers for us when the time comes. I think that's the way it'll go.
Regards, Matt B
WT,
Yep...sometimes stochastics are better than knowledge. I have noticed that when folks are carrying umbrellas it's almost always causes it to rain. Let's hope Y does have a sudden philosophical shift.
I may self have just developed a great fondness for future traders. I've been wanting to buy one particular oil stock for a while but it's been priced high like most oils. Thanks to the pessimism of the future traders all the oil have quickly taker a dip. My target stock is now down 25%...and all the analysts liked it when it was at the top. Even when you're not a wolf it's fun to sit on the hill top and watch the sheeple run this way and then that way.
"the CNBC Consensus [indicator] suggests that oil prices will be closer to $200 than $100 by the end of the year."
You could be right, but currently oil prices are still trending down and I'm glad I sold out. Admittedly I wouldn't short into a rally to $136 any longer.
The speculators can affect the price in the short term, the front month contract doesn't close for another 3 weeks or so. So there's several weeks left for the speculators to squeeze out the overly leveraged longs, before supply/demand considerations come into play.
Question for all of you oil experts out there -- If we were to ramp up ethanol production tomorrow to full capacity, how far would the price of oil drop?
We can't get rid of oil overnight, but if we invest in clean, renewable fuels like ethanol, we can take a big step in solving this energy crisis. Count me in for American-made ethanol.
Ethanol would have virtually no effect on the price of oil. Diesel is what's driving the price right now.
In recent weeks, we've had a build in diesel inventory in the U.S., despite diesel shortages in China, India, South America, and even Saudi Arabia, in addition to a slew of smaller countries. It's the build in diesel inventory that is driving down oil prices here. (Plus a determination to cut oil inventories to the bare bones minimum.)
Meanwhile, most of the places with diesel shortages continue to refrain from buying due to price controls.
Essentially, much of the rest of the world (the part of the world with the largest demand growth) has started de facto rationing (many to "control inflation") even at the expense of their own economic growth. China, for example, recently organized its aluminum producers to cut production by 10% until after the grain harvest.
I think a huge part of the price volatility in the markets is coming from government interference in the markets, both in the U.S. (the spec witch hunt and threats to start emptying the SPR) and elsewhere (China's price controls, etc.)
The markets are becoming a place where, instead of betting on supply and demand, you're forced to place bets on the whims of politicians. It truly is becoming a poker game rather than a market, so governments are achieving exactly the opposite of what they'd want to achieve if they were smart. There's no way to get accurate price signals when you're betting on the moods of a handful of powerful people.
Without accurate price signals, oil producers can't plan risky production, and consumers can't make rational investments in efficiency.
A number of people around here have predicted that free markets would be an early casualty of the energy crisis. I think they're being proved correct.
I doubt very much that this CFTC report will change anything, since everything they said in this report has already been said in other recent CFTC reports.
I agree Muskie - ethanol production is a good start to ensure that we don't depend forever on foreign oil - it may not the be sole solution, but investing in biofuels and alternative energies are the way to go in this time of energy uncertainty.
Ethanol does not scale to the level necessary. Ethanol may play a very small place in stabilizing our energy future but we will not be able to continue the "happy motoring utopia" in which we have all grown up by using ethanol.
Change is coming whether we like it or not. We can either adapt to that change by choosing from the available paths to us or nature will select one path for us, whether we like it or not.
At least link to something to back up your slogan.
A billion tons of biomass would cover 30% of all US energy in 2030.
http://www.eesi.org/publications/Fact%20Sheets/EC_Fact_Sheets/Factoid1.p...
A billion tons of ethanol stock would replace 50% (80 million gallons) of current US gasoline(150 million gallons).
http://www.ethanolproducer.com/article.jsp?article_id=3096
BTW..did you forget...neither does crude oil, foreign or domestic?
Some possible effects of new limitations on speculative participants, in oil futures markets. (People have already talked about a number of these).
First, my view is that speculators play the role of information aggregators. The CEO's of free market oil companies, the National Oil companies, government and institutional users--none of these are able to spend all their time aggregating information about global oil supply and demand. Prices are always imperfect. But, price is information. Less information, means the price is even more imperfect. So, if a good portion of speculators are driven from the US based oil markets I see the following coming to pass:
1. The marketing and trading departments of the large global integrateds will have a field day, because their firepower will no longer have an offset. They will use their new influence in a lower volume, lower liquidity environment, to gain advantages. That's not exactly a bad thing. But it will create choppy pricing. There is a good story of what Shell traders were able to do, about two years ago, when they squeezed the heck out of some players in the heavy-light spreads. Shell pounded the market with purchases of heavy sour stuff. Then they fed out the extra back onto the market after the price had spiked, and kept the rest. Again, this story shows how trading in front month is both fundamental but trading-influenced. Shell saw that the sour was underpriced, and they wanted some. But they also saw where players were positioned. So the markets will see more of this.
2. Commercial users will get hosed. Airlines, municipalities, and other commercials users who hedge usually by hiring a hedger will find that their activity is no longer passing through as much liquidity. The market will see them coming, and I would expect over time their purchases will more often go off at premiums. I would also expect expiry each month to get more volatile. Most importantly, there will be less liquidity out the curve. That will be terrible for commercial-users.
3. Small producers will find it more difficult to hedge out along the curve, thus making it harder to fund their expansion. We know the large integrateds don't trade as much out the curve. But all the smaller producers do. And it's the smaller producers who are actually successful at finding more supply. We might see a side-market develop between commercial-users and small producers, both looking to trade supply as a reference price point out 2-3 years. They could still record the trade at the NYMEX. But, neither would have liquid price action along the strip as a reference.
Finally, there's no question that trading would migrate elsewhere, to other exchanges. I could see Brent, and Arab Sour, and maybe even a Russian grade becoming new benchmarks. In fact, I would wager that Russia would love to host a new global oil exchange.
Gregor
Bonus comment for the day: https://twitter.com/gregormacdonald/statuses/866158163
Second bonus comment for the day: after I heard Michael Master's testimony, I did an SEC search for his investment fund, and was delighted to learn he was very long Airlines, Truckers, and Consumer Discretionary.
My sense is that Gregor is spot on here.
The rhetoric surrounding this issue suggests that the futures market sets price. But it only really reflects price, given that the cash market sets its contracts at a discount or premium to some futures benchmark. If it gets too out of whack with prices consistent with supply and demand, the cash market would deepen discounts so much that the futures contracts would no longer serve as a useful hedge.
It's pretty simple math, though, to see why it would be reasonable for people hedging against future prices to ask for the prices of the last half year. If there is war with Iran, there would not be any spare production capacity whatsoever. Any sizable disruption, from Nigeria or a hurricane or what have you, would mean a real shortage.
I suspect that on balance the market has decided that war with Iran will not happened. That Nigeria appears to be a little more serious about its problems. That many subsidizing nations are beginning to abandon or at least reduce subsidies--such as Nigeria. That even Chavez appears to think that historical determinants aren't with him at this very moment. And that Iraq's production levels are back at pre-war levels.
I too agree that Gregor's post is spot on.
The government murder of the markets will not be good for consumers or for rational solutions to the energy crisis.
Here was another of the 20 graphics from the CFTC report, showing term structure of crude oil futures primarily being in backwardation (long dated prices lower than spot prices) during the past 5 years. Expectations of higher prices in the future are generally viewed as a signal to build up physical inventories, which has basically not occured - hence higher price trends have been the rule.
There have only been a few occasions in this bull market when the full curve has gone into contango. As I am sure you are aware, a full length contango is very hard to maintain. It immediately attracts sellers in the distant months, who then buy the front months, in order to store. The sell pressure on the back end and the buy pressure on the front usually is its own undoing. And we have seen that at least two times in this bull market, possibly three times. Each time, the contango has dissipated as quickly as it appeared
This is why I have said that when and if we reach a point when a full length contango appears, and is sustained, it will "likely" mean that enough information has finally, finally been aggregated to determine with confidence that the chances of future supply growth are then falling rapidly, toward zero.
As we know that will indeed happen someday, it would be rather trite of me to say I think we are getting much closer now, to seeing a sustained full-length contango. But, I'll go ahead and say it anyway.
Gregor
What this demonstrates more than anything is the complete inanity of our political system and our ability to discuss much less do anything about any problem.
First, I'd like to point to a nice piece by the Financial Times, "Speculation must be defined before its blamed." Secondly, I'll define every investor as a speculator, we're all putting in money thinking it's going to grow, that is speculation.
Now, the report itself says:
In the last week, we saw the price of oil drop more than $20 a barrel or 15%, in a few days, that should speak for itself. Nothing nefarious, this is how the system presently works, it is in fact how prices are set.
Now a better word for Wall Street jumping on the bandwagon, the oil companies and various national governments reaping obscene profits from a problem with an essential commodity would be - PROFITEERING. But since the ascendence of neo-laissez faire in the last two decades, profiteering is no longer a societal taboo, it's just good business.
Now the oil industry has always been a rather primitive market at best, and for those who believe we are near peak, instead of arguing over semantics and beliefs, it would seem most appropriate to say that both our economic and political systems have failed in very fundamental ways.
Joe said, "What this demonstrates more than anything is the complete inanity of our political system and our ability to discuss much less do anything about any problem."
It should come as no surprise that government is incapable of solving problems. First, it was only delegated the power to secure rights (life, liberty, property), and govern those who consent. Second, the farqed up price system is partly due to the Federal Reserve Note (no par value). Third, government makes nothing but more government. Gives nothing but that which was taken from someone else. Until the "solution" creates more government and a mandate to expropriate more money and power, government will appear impotent.
Cynical, am I?
Certainly...
If you combine Fig 11 and Fig 10 you find that 50% of the WTI contracts were held by commercial swappers and 25% were held by hedge funds. Both these groups are speculators IMO.
If Southwest airlines buys contracts to offset the price of oil that's speculation too(they could have bought gold,etc.).
Notice how little of the WTI commodity market comprises producers and manufacturers--which is the traditional (agriculture)commodities market.
Yet the authors indicate the supply and demand is the real cause. They must believe we can't read their report.
GDP(PPP) numbers don't make a lot of sense.
http://en.wikipedia.org/wiki/List_of_countries_by_future_GDP_estimates_%...
If the US is 18% of the world at 3% growth( non-PPP have much more like 1-2% over the last 3 years and the EU is 20% of the world and grew at 3.2% and the whole world grew at 4.5%, that means the non-US,EU world grew at an impossible 5.5%, so Fig 1 looks wrong. Besides, such a high growth rate always means high inflation which drives up the prices of commodities--i.e. Fig 1 isn't telling us anything about a real shortage.
http://www.data360.org/graph_group.aspx?Graph_Group_Id=149
Looks like the whole thing is a PR stunt to give their employers, the commodities speculators, cover.
I think you have a fundamental misunderstanding of how futures markets work. High percentage of speculators are desirable because they add liquidity to the market. Can they bid the price up in the short term? Absolutely. Are they then stuck with an enforceable contract? Absolutely. So, unless they can find an actual end consumer to take delivery of the commodity at that price, they eat the difference--it becomes a self-correcting phenomenon with natural selection weeding out those who tend to bid up contracts higher than they can sell to end consumers. Likewise, they can bid down contracts too far, but then if it isn't worth it to the marginal producer to produce at that price, they will reduce production and supply and demand will find a new equilibrium--again, with the speculator eating the difference. The "problem" is that consumers are willing to pay these higher prices. That's the market definition of price--the equilibrium point where a producer is willing to sell and a consumer is willing to buy. Unless speculators are influencing one of these two points (such as buy physically hoarding oil), they are only creating short-term perturbations in price which will be resolved by market participation of producers and consumers.
Aside from that fundamental argument, I also disagree that there is a conspiracy to knowingly misrepresent the situation to the public. Is the CFTC to some degree structurally vetted to prefer more trading? Yes. Are they going to intentionally lie to that end? I certainly don't think so, but reasonable people can disagree on that point. A simpler, and more likely explanation in my opinion, is that they have the fundamental understanding explained above, and their report simply reflects that.
I thought I knew how commodity markets were supposed to work.
The example given is usually a farmer creates a contract with a 'speculator' selling his crop at a given price or a manufactures contracting with a 'speculator' to purchase his required raw materials at a given price. The immediate risk is transfered to the speculator, serving the interests of society by keeping the farmer or manufacturer up and running. That's fine.
But today's meta-speculators have turned an insurance policy into an insurance fraud.
Remember 'Double Indemnity'?
http://en.wikipedia.org/wiki/Double_Indemnity_(film)
You can never buy too much insurance, right?
A speculator may create a contract with another speculator, neither having anything to do with the farmer. In fact, as I understand it, there is no limit to the number of paper contracts that may be created on a given base of real product. All are 'side bets' (as long as the contract is speculator to speculator) as to how the real (spot) price is going to go.
Yes, there are scapegoats: Ben Bernanke and Masaaki Shirakawa. Hang them first!
The CFTC is not a neutral party. They have an interest, now that institutional investors have arrived with lots of money @ the commodities exchanges for the first time.
http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2006/nov/pilot-co...
Whether these entities are 'speculators' or 'investors', I'll leave to others. At some point of perspective, the two concepts merge.
I find this particular story most appropriate:
http://www.economist.com/world/britain/displayStory.cfm?source=hptextfea...
The Bank of England is constrained by rising prices which would call for rise in short term interest rates. At the same time, the productive economy is stumbling which calls for an easing of rates. What will Mervyn King do?
He'll keep rates at 5%. Will it work ... and take Great Britain out of its 'Lesser Britain' funk? No!
Why, you ask? Because financial institutions are now international and can borrow American dollar funds (2.25%) or Yen funds (.5%). King can't close the barn door to keep the cows in or the foxes out because the door has been removed from its hinges!
According to Doug Noland's weekly update on the US money supply:
"M2 (narrow) “money” supply jumped $24.5bn to $7.699 TN (week of 7/7). Narrow “money” has expanded $236bn y-t-d, or 6.1% annualized, with a y-o-y rise of $442bn, or 6.1% ..."
http://www.prudentbear.com/index.php/CreditBubbleBulletinHome
With our economy growing at less than 1% where does that excess money go? The US just finished distributing $130 billion in subsidy (stimulus package). Where did THAT money go?
Oil, baby! Gold, too ... and into agricultural products and other commodities. America faces a second 'Great Depression'. Do you think people standing at the edge of a financial precipice are bidding up the price of something that they have been dependent on for their entire lives?
Think about it. The markets (did) reflect consumer participation more directly than stock or bond markets do. Why would broke people bid up oil to twice what it was last year? The reason is they didn't. The new intermediaries are not financially strapped, CalPERS has billions to throw around and can cause the price of anything to jump just by bidding in an exchange. From a yield standpoint, commodities are the only game in town. Stocks, bonds, and real estate are in bear markets. Direct investment in commercial enterprises requires a long term commitment, special expertise and a willingness to compete directly with (low wage) China and India. CalPERs isn't going to build a copper wire factory somewhere, they'll have their in-house brokers go long in commodities ... and give the brokers $500 million to do it with.
The runup in oil prices is similar to the runup in real estate prices here in the US from 1992- 2005. The rationalizations by both groups, real estate and oil investors are almost identical; "Prices will only go up because they always have. They aren't making any more (land/oil). 'Conditions are different now." The same crookedness and manipulations (and massive subsidies for highways, mortgages and house investments) kept prices rising even while the supply of houses expanded massively. The subsidies for petroleum are its tax- favored status and the depletion allowance. Well, you know ... house prices DO go down ... and the collateral damage is crushing!
To get prices under control, the US's and Japan's have to set short term interest rates in line with the ECB and the BOE. This will end the carry trade in petroleum and other commodities. Prices will fall in line with production, refining and distribution costs. Oil production currently is dirt cheap; less than $10 a barrel in the Middle East. YES, the cheap oil is maturing out of existance and replacement will will cost more than $70 a barrel, but that is a problem for the future. Resolution of the money/currency/interest rate imabalances will make it easier to fund solutions to the longer term supply and conservation issues.
According to Doug Noland's weekly update on the US money supply:
"M2 (narrow) “money” supply jumped $24.5bn to $7.699 TN (week of 7/7). Narrow “money” has expanded $236bn y-t-d, or 6.1% annualized, with a y-o-y rise of $442bn, or 6.1% ...
But let us not forget that the national debt is 9.4 Trillion. Ever wonder how one can pay 9.4 trillions with only 7.7 T?
Can you spell "K A P U T"?
"B A N K R U P T"?
What about all those outstanding mortgages, private sector debt and account holders?
Where's the "Beef"?
And, NO, the government can't just "print up more FRNs". Pursuant to Title 12 USC Sec. 411, each note is an obligation (debt) of the U.S. to pay lawful money. In order to authorize more FRNs, the Congress has to authorize MORE DEBT (Now you know why they just LUV that red ink...)
It's much worse - - - the national debt is denominated in lawful money (gold or silver coin). It would take a sum of gold bullion 85 times as much as the whole world's supply of above ground bullion to pay off that absurd debt. *(Silver is even worse - takes 17 times more silver than gold).
And you thought impossible contracts were illegal, immoral and just plain stupid!
Never underestimate the U.S. Congress, when it comes to Gross Stupidity...
NYT: Speculators Aren’t Driving Up Oil Prices, Report Says