Friday, May 16, 2008

Consumers first - oil futures later

Finally Congress gets its act together and starts to address the problems brewing among speculators in the oil pits. The Consumer-First Energy Act introduced a couple of weeks ago comes to the floor and a vote is expected before Memorial Day. The proposal is supposed to address the speculative bubble among energy traders. First on the list is greater oversight for energy futures trading and second, a proposal to mandate higher cash collateral for margin requirements.

Here are some tidbits of info that show how speculative the market for energy future trading has become:

There are now 634 energy hedge funds, up from just 180 in October, 2004.

Of the total funds, 210 are strictly energy commodity funds trading oil or oil futures and options, as opposed to the stocks of energy companies.

The global futures market in petroleum is currently valued at about $500 billion. Trading in the electronic or over-the-counter (OTC) market, which neither the U.S. nor the U.K. regulates, is valued at between $1.5 and $3 trillion.

As far back as June 2006 the US Senate noted in an investigation that there is substantial evidence supporting the conclusion that a large amount of speculation has significantly increased oil and gas prices. The report also cited the US Commodity Exchange Act (CEA) which mandates the CFTC to ensure that prices on futures reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The senate report was ignored by the media and congress, but now that luck seems to change.

NYMEX traders are required to keep records of all trades and report large trades to the CFT together with daily trading data providing price and volume information. In contrast traders on unregulated OTC electronic exchanges are exempt from CFTC oversight.

In January 2006 the Bush administration opened the door to potential oil price manipulation by permitting the ICE, the largest electronic energy trading exchange, to trade US crude oil futures (WTI) on the London exchange. Despite the fact that US traders were trading US oil, gasoline and heating oil futures contracts, on the ICE exchange within the United States, the CFTC has no oversight. Basically what it boils down to is this:

Persons within the United States seeking to trade key US energy commodities - US crude oil, gasoline and heating oil futures - are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

In June 2006, the senate investigation estimated that of oil traded in futures markets at some $60 a barrel, about $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today's $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London, it is more likely that as much as 60% of the oil price today is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London, and they certainly aren't talking.

source: Oil Traders Draw Congress' Ire
by Moira Herbst, BusinessWeek

Speculators knock OPEC off oil-price perch
By F William Engdahl, May 6, 2008

No comments: