Oil Trading: The CFTC Brings "Duh"! To a New Level
Today, the Washington Post reported in a remarkable article that "A Few Speculators Dominate Vast Market For Oil Trading." It reported that "regulators had long classified the Swiss Company VITOL as a trader that primarily helped industrial firms that needed oil to run their business."
But then, surprise, surprise when our valiant oversight heroes, the Commodity Futures Trading Commission examined VITOL's books last month they found 'mirabile dictu' that VITOL was in fact more of a speculator holding oil contracts as a profit making investment rather than a means of lining up the actual delivery of fuel. "DUH"! The article went on to point out that at one stage this July the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange alone. The CFTC has now determined that a massive amount of trading activity was concentrated with a handful of speculators, and that currently 81 percent of the oil contracts on the NYMEX, I repeat -- 81 percent, are held by financial firms speculating for their clients or for their own account. And that is for the NYMEX alone, not counting London's ICE, nor the Singapore Exchange, the Dubai Merc, on to Tokyo, etc.
Vitol itself held contracts equal to 57.7 million barrels of oil or three times the amount of oil consumed each day in the United States. How many square miles of storage would it have taken if Vitol had taken delivery of this vast quantity?
What is extraordinary in the unfolding of this story is that it took this long for the CFTC to access this data and reach its conclusions. It betrays a total lack of professional competence and oversight failings of monumental proportions. That we have an agency that does not have on staff professionals sufficiently versed in what they are meant to be monitoring. That they would be lulled into the belief that VITOL did business in oil simply supplying industrial firms, and oblivious to VITOL's reputation in the field as a massive trader in speculative oil futures contracts, is irrefutable evidence of a totally dysfunctional agency.
To add insult to injury, given its recent findings, a spokesman for the CFTC pontificated balefully, "To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices." Thus in one stroke whitewashing the actions of the commodity exchanges themselves and bringing joy to oil producers who want us to believe nothing less.
It is beyond time to close down the CFTC and throw away the key!
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Long on noise and short on facts.
"...curren
Is 81% a lot?
Your comment offers no larger context. 81% happens to sound like a lot. What percentage of contracts in, say, Soybean Oil are held by speculators. Or Sugar? Cotton? The truth is that MOST futures contracts are held by speculators.
Look at open interest vs. actual delivery.
Speculators typically dump contracts before "first notice date", because of margin requirements. For speculators to be able to control prices, they'd have to take delivery. Not a common practice.
There are a lot of restrictions designed to prevent cornering the market. As with any regulated market, these should probably be revisited from time to time.
Actually 81 percent is a lot.
Sounds like a lot.
And, is a lot.
It's like more than four out of five.
I know your angle here is what percent of futures contracts are held by speculators.
And, maybe there is something to that being the relevant factor in this discussion.
If so, I'll leave that point to you. It's eighty-one percent.
But, in the quote you posted, I was more taken by the fact that all that money was being put to the use of speculating in the oil futures marketplace, rather than to something a little more productive. You know, like to help the economy and all.
Eighty-one percent of all the oil speculation contracts were held by financial firms who obviously had nothing better to do.
This raises the point that, to an increasing extent, the money supply is being used to do nothing more than make more money. Those in charge of the nation's monetary policy and the money system have already failed miserably to live up our monetary policy goals.
Money is used to make money.
Money is not being used to create jobs or produce anything.
The rich are getting rich, and the poor are getting poorer.
This is how they do it.
But, that's another matter.
"It's like more than four out of five"
And it's like, average or below for commodities. This level of speculative participation in commodities markets is a) not unusual, b) not new. It's like, more than 100 years old.
The only reason anyone gives a damn about futures markets these days is because they don't like the price of oil lately. But the price of oil has been on the rise, with various hiccups, since oilmen took possession of the white house. Remember Cheney's comments about conservation several years ago? Did he call it "quaint"? Something to that effect. What the hell did people expect?
Blaming the price discovery mechanism - which is a constant - is ludicrous.
Money shouldn't be used to make money? I guess you accept no interest in your bank account?
But that's another matter.
You ask why the speculative money is going into commodities and not other areas of the economy. The answer is that there are few other places for money to go. The stock market and large segments of the bond market are getting destroyed. Plus, the fed is printing money, the dollar is weakening, and the supply/demand fundamentals for oil are excellent - thus the money goes into oil and other commodities. It's very simple.
when the stock market and the real estate is going through down period where do you think the money will flow. Commodities duh !!
Money is used to make money. Of course. what else would it be used in doing? thats the idea that capital should flow towards its most efficient use.
let me give another example hated by liberals. they always blame that oil companies are not investing in alternate energy.
Its not Oil companies business to invest in alternate energy (just for investing sake). If they believe their capital is better deployed elsewhere (stock buybacks + dividend payouts) thats what they will do. thats what they have been doing.
if tomorrow say oil gets depleted completely and solar/wind energy is the only means of producing energy, well guess what? these companies have plenty of money in their chest to buy up a few top ones in that field.
If the rise in the price of WTI contracts on the NYMEX is the failure of CFTC in its regulatory capacity, possibly due to some vast right wing conspiracy, why has the price of Brent on the IPE followed the same pattern, seeing as it is traded in London. Is there in fact a Labour Party conspiracy too?
See the answer HERE.
http://www
I guess you haven't been reading the comments.
The link is useless. It's just more conspiracy drivel.
There is no failure of its regulatory capacity as the vast majority of commodities trading is perfectly within regulation. As for Brent following the same pattern? Why has coal, steel, and the ocean dry freight index followed the same pattern although they're is very little to no speculative trading in them?
Where was the CFTC when three banks together placed one massive short position on gold?
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
I don't think they changed their address since then.
:-)
How is this not a form of asymmetrical economic warfare upon The United States it's people and economy, along with our western industrial allies..?
It is not only weakening us, but also serving to enrich those who are our adversaries and potential adversarie
Our adversaries?
Do you mean the Wall Street Bankers and the IMF?
To the "free-Capitalists", there is no such thing as America.
There is only making money.
There is no such thing as a goal of full-employment or American economic stability in terms of production and price.
There is only making money.
The US itself has no identity and no allies within the trading pits and their back room and Board room supporters.
Money reigns supreme in this country.
That's all true I know more of it than you do...but this swindle is also enriching nations such as Russia and Venezuela and Mid East Countries who do fund terrorism.
Also I am framing an argument that speaks to the hypocrisy on National Security of the Republican party and John McCain..!
Here's more on this huge swindle..
http://www
Remember the "ole" Hunt brothers and the silver futures!
Yeah, they lost every penny. Hubris isnt confined to the markets
Yeah, I remember that all the silver they ever bought is still around. What happened to the gasoline you put in your car's tank last Thursday?
It's all the same... expect when it isn't.
:-)
What a surprise. That more people whom Dick Cheney and George Bush put into place in order to sabotage the effective working of regulation, ESPECIALLY in areas of personal interest to their cronies, and the performance of a government agency should be eminently successful in being incompetent.
And the CFTC response that the Washington Post analysis is wrong -- these stripminers of the public wallet drove up the prices on only half of the available market , not 80% -- is hardly comforting.
As we have seen in Iraq, it is not possible for people to screw up this badly by accident.
Here is the oversite and regulation problems !!!!!!!!
The Republcians Bush has put in the Commodity Futures Trading Commision. She has little education in Futures or the stock market but she has a Political Science Degrees and big connections !!!!!!!!!
Ms. Sommers joins the CFTC from the International Swaps and Derivatives Association (ISDA), where she was the Policy Director and Head of Government Affairs. Before joining ISDA, Ms. Sommers was the Associate Director of Government Affairs at the Chicago Mercantile Exchange where her responsibilities included regulatory and legislative affairs. From 1991-1995, Ms. Sommers worked on the staff of Senator Robert Dole. A native of Kansas, Ms. Sommers received her Bachelor of Arts degree in Political Science from the University of Kansas.
Figures. It seems EVERY single person in charge of every part of the Executive Branch is a political hack. No reason to believe something so near and dear to the hearts of both big oil and Wall St would be any different.
Bet Phil Gramm had something to do with the dummying down of the CFTC. After all, Wendy Gramm was on it in the early 90's.
God forbid, Mc Cain gets elected, or we'll get another dose of Gramm.
Wendy Gramm was The CFTC Commissioner and then took a part time job with Enron that paid her $900,000.0
Or government is so rampant with corruption which is why we are paying for it now dearly and will for a long time all over the world...
Ray, right when the price of crude was at its highest someone from the CFTC that was in charge of investigations left to go into private business. I can't remember his name but I bet there is a story we want to know behind it.
I should do my homework before I write;
"The US commodities and futures regulator on Wednesday lost its lead investigator to a private law firm......
"The departure of Gregory Mocek, director of enforcement at the Commodity Futures Trading Commission
http://www
The article paints a different picture than the one I envision.
The simple fact that there a lot of speculators in the market doesn't mean the price is going up. The price goes up when everybody is on the same side of the trade - in this case long (the longs overwhelm the shorts and make them cover). If we're in a bear market for oil, the speculators will mostly trade the short side; so in that case, there will still be a huge amount of speculators in the market, but yet the price will be going down, not up.
Thanks for explaining that simple fact to us.
You should add to that being long on oil only works as long as the final buyers (i.e. all of us) are willing to pay a price at the pump that is higher than the long position plus crack spread plus state and federal taxes plus transportation cost etc.. As soon as we stop paying those prices for gasoline, being long on oil means losing big time money.
That's true but don't forget that the crack has been only $5 a barrel for a long time and retail margins have been negative for almost the entire runup in the oil price. Only because of the refiners and gas stations not making money, were American consumers able to withstand the tremendous increase in the price of oil. The margins on distillate, however, is another issue as there was a decent crack there and dozens of trucking companies went out of business as a result.
It is assumed that Vitol was long their 57,000 contracts. How do we know that they weren't short ?
If speculators have made money being long oil futures contracts, who are the shorts that lost the money ?
Perhaps you missed the gist of the story.
The CFTC ain't doing nothing to protect the marketplace from manipulation.
Why did they class VITOL as an aggregating buyer and seller of physical oil, and then find they are speculators to the n-th degree?
I admit the posting could use a little more research, but Learsey, with whom I often disagree, is just making the point that we can't count on the market regulators to make good decisions or to inform good policy if they don't know what the F* they're doing.
That's pretty simple.
The real solution to the problem is to strip the CFTC from its role as market-manager in oil and energy products, and to restore the illegality of these shenanigans back to the pre-Enron era.
What we need is more honest free-enterprise in these products.
Let the buyer and seller OF THESE PRODUCTS set the price we all have to pay.
I haven't heard Learsey go that far, for some reason.
But, he's good at nationalizing our energy resources, so I still read him.
I agree, let the buyer/seller of the product set their own prices, hence competition.
The honest free enterprise in these products brought you the oil crisis of 1973 when KSA declared that they won't sell their product to refineries in the US. That was totally legal, by the way. KSA owns that oil and if they so chose, they can simply leave it in the ground and wait for sunny weather over the Arabian Peninsula.
This is a typical case of "beware what you wish for".
You fundamentally misunderstand the way the market works. It's not a true zero sum game. Just because Vitol was long does not mean anyone "lost" money by going short. If front month contracts start at $100 and vitol bought at $105 and holds til $110, the party selling at $105 didn't "lose" anything other than the profits between $105 and $110 it failed to make. It still made profits between $100 and $105.
Hmmm.... you just described what sounds like zero sum to me.
learsy knows nothing about oil
and has no interest in learning about it
all that matters to him is using it as a political weapon
I suggest you read his bio.
I suggest you read the writings of people who actually understand oil.
Please, someone explain to me WITH NUMBERS how holding a futures contract on oil moves the price of oil which is ultimately only determined by how much the buyer is willing to pay?
I mean, if I were going to buy oil futures for next month today that are worth $200/barrel, how would that move the price of oil up?
Any takers?
It is simple. See the movie "Trading Places" with Eddie Murphy and Dan Ackroyd.
When there is freezing weather in Florida people think that oranges will be more scarce in the future. Speculators buy futures contracts for frozen OJ and bid up the price of OJ in the future.
The future price of oil usually gets bumped up when people think that something is about to interrupt the supply.
If the news reported that the Suez Canal was plugged up by a shipwreck, oil futures contracts would go up.
Enron used futures contracts to raise the price of electricity. They ran up the price by buying and selling with themselves and then unloaded the commodity at inflated prices to utility companies. The utilities paid real money. Enron was just doing paper transactions with themselves.
Wait. How does the price of a contract over oranges determine the price for which I am willing to buy those oranges? See, if I go to my local grocer and oranges cost $5/lbs, I am simply not buying. I really don't care how much the grocer paid for those oranges. Or how many people signed futures on those things. I AM NOT BUYING.
So how is that different from oil? US consumption is down by 800,000 barrels per day. And it could be down by 10 million barrels per day if we really wanted to. So what is the problem? If oil is too expensive, buy less and less and less of it until it is either cheap enough or you don't need it any more. That is the way to go.
And people say Hollywood is useless to the understanding of everyday life.
Good insight, given the predominance of "Low Information Voters".
See Paul Peete's Profile
oil is tied to the dollar, bid oil futures up and the dollar fallsw, trade back and forth between the two and you take 13billion and turn it into 263 billion. Reaqd David cho's Wapo article and see how we've been getting screwed by the CTFC.
Please explain the mechanism that makes the price of oil go up if I sign a futures contract over $200/barrel. In detail. With economic theory.
I already answered this question once.
I gave you a link to the NakedCapitalism article on same.
It is quite simple. They have done the research.
Here it is again.
http://www
The bid on TODAY's futures contract SETS the price for today's bilateral contract for whatever its term.
It's pretty simple, really.
That is not theory.
That is how they have found the market WAS working.
It may be different now.
But somebody needs to do the research, and show that is so.
Respectfully.
You have given no explanation but only the usual hand waving. Your link does not provide such an explanation either.
Next.
It's a price discovery mechanism. If enough buyers buy in at that strike price, suppliers will start sitting on supplies so they can sell higher and spot prices spike pretty quickly.
Except that suppliers have not been sitting on supplies. Please inform yourself.
3 DAYS worth?????? Holy CRAP!!! That's a LOT of freaking oil!
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