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Raymond J. Learsy

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Commodity Exchanges Prime the Pump for Higher Oil/Gasoline Prices

Posted: 05/31/2012 9:10 am

In April, the CME Group, the largest commodity exchange group in the country, comprising the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBOT), the New York Mercantile Exchange (NYMerc), and the Commodity Exchange Inc. (Comex) blasted the president's plan to put regulators in charge of margin requirements for oil futures and warned the move risked raising prices.

The CME went on to pontificate, "The Administration's proposal to use margin requirements to control cash prices is misplaced. Taking away from the exchanges the ability to manage margins would make the markets less efficient, less tied to fundamental, and would create the potential to push the hedges out of the market which would make oil more expensive for all consumers."

Really!?

There is a large body of discourse pointing to the untrammeled, barely regulated trading on the exchanges that has distorted the price of crude oil and in turn oil products such as gasoline to levels ever higher, losing all vestiges of any connection to supply and demand. The commodity exchanges have become casinos welcoming all players whose only interest is the spin of the roulette wheel, never either consuming, producing nor taking title to the oil they are placing bets on. As far as the exchanges go, their key concern is to keep the players coming in the door.

All well and good, but the croupier begins to play a far more sinister role when he not only provides the gaming table, but also manipulates the price of the gaming chips. Over the past weeks we have seen a significant break in oil prices. Here for once in months if not years we have an oil market evolving in a way that could significantly reduce oil and gasoline prices and in turn damper the hectic tempo of oil trading on the exchanges -- it seems lower prices result in lower exchange turnover. So to give some underpinning to sliding oil prices it would appear the CME Group, knowing where their bread is buttered, did what they could in order to bring in more traders and trades in what could be seen as an attempt to support the eroding price of oil/gasoline -- they lowered the margin requirements for each crude oil contract of 1,000 barrels from $6,885 per contract to $6,210, making it that much less expensive to buy your chips, so more can play in the casino to help halt the slippage of crude/gasoline prices.

Maybe we should all send our next gas station tab to the good folks at CME headquarters in Chicago. Certainly it appears, given the CME's recent actions, their discomfiture in President Obama's suggestion to put regulators in charge of margin requirements 'doth cause them to protest too much.'

 

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