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Oil Speculators Guilty!

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July 28, 2009 – Comments (3)

I love the smell of validation in the morning.

Almost 3 weeks ago, the Commodity Futures Trading Commission (CFTC) announced they were going to take another look at the potential cause of last year’s tremendous run-up (and subsequent collapse) of oil prices; inspiring this TMF editor to pen an article on the subject.  Musing that “the oil futures market was never meant to be an investment vehicle, and that oil was not intended to be an asset class” I noted that that the real problem is that unlike most other financial instruments every 10% increase in oil prices shaves 0.4% off of global GDP.

Well the results are in and, per the WSJ, the CFTC has determined that speculators “played a significant role in driving wild swings” in the price of oil.  This new report, which is a reversal of the findings under the Bush administration, will be officially released in August.

Of course the real question remains how CFTC Chairman Gary Gensler plans to curb excessive speculation in a way that doesn’t impair the commodity markets.  Position limits are a widely discussed concept, as they already exist for some commodities.  The Nymex is preemptively setting “hard expiration position limits” on natural gas traders in an attempt to lessen the volatility surrounding contract expirations, despite opposition from the trading community.

What does our Foolish community think?  Should we have position limits or perhaps ban commodity ETFs which have flooded the market with liquidity and distort prices when they roll contracts?  Comment below and let me know.

Also be sure to check out Ilan Moscovitz’s “What You Should Fear Most Right Now.” It is a great article that tackles the topic of speculation vs. regulation.

-Dave

3 Comments – Post Your Own

#1) On July 28, 2009 at 1:12 PM, Londamania (65.92) wrote:

I like what Cramer is pushing - eliminate the 10:1 leverage that exists in commodities trading.  We fixed that in stocks a while back and it's time to do the same here.  That will effectively force a position limit and what's wrong with making someone - gasp - actually pay for that they are buying? 

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#2) On July 28, 2009 at 2:06 PM, IBDvalueinvestin (99.68) wrote:

I also was an oil speculator, who could blame me? Oil was skyrocketing from $40 to $147. If there is profit to be made speculators will come.

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#3) On July 28, 2009 at 2:12 PM, SkepticalOx (99.44) wrote:

Maybe we should have smaller oil derivatives so that homeusers can hedge against. Or gasoline derivatives, or whatever.

Prudent and smart businesses already do it. Why not homeowners? Imagine sitting down with your financial planner, determining how much gasoline you use every year, and then hedge it.

Derivatives are not the problem. It's how people use it (or don't use it). 

 

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