- Jun 6, 2007
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In the media and in Washington many experts and politicians are trying to use the recent CFTC report on Commodities Swap Dealing and Index Trading to support the proposition that wrongful speculation has not been responsible to a significant degree for the run-up in oil prices over the last year and therefore there is no need to pass legislation curbing excessive speculation. It will be an egregious wrong of historic proportion if these proponents get away with this overreaching. This CFTC report although well intentioned has limited value because it was limited in its scope and relied on voluntary reporting by select swap dealers and index funds. It should just be considered one of many sources to consider in examining this issue.
Even the CFTC staff recognized the limited value of this report when they wrote in the report This --- survey is not able to accurately answer and quantify the amount of speculative trading occurring in the futures market (p.2). The raw investment data the CFTC got for this report breaks down investment activity into commercial and noncommercial investor activity. But one cannot assume, as the CFTC report indicates and is common knowledge, that all commercial activity is non-speculative. So on the critical question of whether or not speculators are responsible for the inordinate increases in energy prices seen over the last year the report offers no significant value because not for any time period monthly, daily or any time during a trading day does the CFTC know how much of the commodity investment activity going on through swaps or index funds is speculative. This shortcoming of the report is a big deal and should really block this report from being used by politicians, lobbyist et al. as a basis for derailing legislation curbing harmful speculation.
The CFTC report did provide some information that indirectly supports curbing excessive speculation. The report essentially says that speculators increased their spread trading as opposed to long position or short position trading in the NYMEX Crude Oil options market over the past ten years from 10 % of the market to nearly 45 % of the market in June of this year with an approximate 8% increase in the first six months of this year. This is noteworthy because in spread trading the speculator is taking offsetting long and short positions and one would think such a speculator is never going to lose big like the long or short position traders. This is relevant for consumers because consumers dont want bull energy commodity markets because that means they are going to pay more for energy. This increase in spread speculative traders means that the market has an increased number of traders that are poised to create a bull market because with their spread trading they will never lose big and considering the tight supply-demand relationship in petroleum commodities which continually puts upward pressure on pricing. This development provides all the more reason to use legislation to curtail commodity speculation.
Anti-speculation reform advocates appear to be drawing a lot of attention and placing a super importance on the CFTC findings that "the activity of commodity index traders during this period(12/31/07 to 6/30/08) reflected a net decline of swap contracts (in oil) as measured in standardized futures equivalents". The big inference their trying to make is that during that six month period oil prices skyrocketed and if swaps were the culprit the statistics would indicate a significant increase not a decrease in swap contracts. This is an overreaching and bogus conclusion because the CFTC findings only compare to specific dates in time 12/31/07 and 6/30/07. The real relevent time periods are the hours before significant price jumps in oil future contracts, jumps of $2, $3 and $4 per barrel that would indicate if there could be a causal connection. However, the report did not gather this information so the report can't be provided as evidence for such conclusions.
These anti-speculation reform advocates that want to use this CFTC report as dispositive that America does not need any legislation curbing speculation don't focus attention on the fact that not all top officials at the CFTC support the findings of the report. Commissioner Bart Chilton in his dissent in the report essentially says that the CFTC report should not be used to support the conclusion that there has not been a causal connection between speculation and the run-up in oil prices over the last year because the CFTC data used for the report and the CFTC analysis is not that reliable.
The U.S. economy has been super fortunate to see oil prices drop over $50/barrel from its $147/barrel high after having been below $75/barrel a year ago. This unprecedented drop was due to an unprecedented and extremely unusual combination of factors. Factors such as a significant drop in oil demand, economies around the world on the verge of a recession making short-term big increases in demand unlikely, the banking and investment banking industries in the U.S. in such bad shape the likes of which haven't been seen since the 1930's Great Depression - curtailing credit to commodity investors, etc. The bottom line is the American people can't and shouldn't have to depend on extraordinary favorable events occurring to bring down petroleum prices the next time a massive increase occurs at the hand of speculators. The Congress and the President must pass soon legislation reforming commodity speculation so this nightmare situation doesn't occurr again.
Even the CFTC staff recognized the limited value of this report when they wrote in the report This --- survey is not able to accurately answer and quantify the amount of speculative trading occurring in the futures market (p.2). The raw investment data the CFTC got for this report breaks down investment activity into commercial and noncommercial investor activity. But one cannot assume, as the CFTC report indicates and is common knowledge, that all commercial activity is non-speculative. So on the critical question of whether or not speculators are responsible for the inordinate increases in energy prices seen over the last year the report offers no significant value because not for any time period monthly, daily or any time during a trading day does the CFTC know how much of the commodity investment activity going on through swaps or index funds is speculative. This shortcoming of the report is a big deal and should really block this report from being used by politicians, lobbyist et al. as a basis for derailing legislation curbing harmful speculation.
The CFTC report did provide some information that indirectly supports curbing excessive speculation. The report essentially says that speculators increased their spread trading as opposed to long position or short position trading in the NYMEX Crude Oil options market over the past ten years from 10 % of the market to nearly 45 % of the market in June of this year with an approximate 8% increase in the first six months of this year. This is noteworthy because in spread trading the speculator is taking offsetting long and short positions and one would think such a speculator is never going to lose big like the long or short position traders. This is relevant for consumers because consumers dont want bull energy commodity markets because that means they are going to pay more for energy. This increase in spread speculative traders means that the market has an increased number of traders that are poised to create a bull market because with their spread trading they will never lose big and considering the tight supply-demand relationship in petroleum commodities which continually puts upward pressure on pricing. This development provides all the more reason to use legislation to curtail commodity speculation.
Anti-speculation reform advocates appear to be drawing a lot of attention and placing a super importance on the CFTC findings that "the activity of commodity index traders during this period(12/31/07 to 6/30/08) reflected a net decline of swap contracts (in oil) as measured in standardized futures equivalents". The big inference their trying to make is that during that six month period oil prices skyrocketed and if swaps were the culprit the statistics would indicate a significant increase not a decrease in swap contracts. This is an overreaching and bogus conclusion because the CFTC findings only compare to specific dates in time 12/31/07 and 6/30/07. The real relevent time periods are the hours before significant price jumps in oil future contracts, jumps of $2, $3 and $4 per barrel that would indicate if there could be a causal connection. However, the report did not gather this information so the report can't be provided as evidence for such conclusions.
These anti-speculation reform advocates that want to use this CFTC report as dispositive that America does not need any legislation curbing speculation don't focus attention on the fact that not all top officials at the CFTC support the findings of the report. Commissioner Bart Chilton in his dissent in the report essentially says that the CFTC report should not be used to support the conclusion that there has not been a causal connection between speculation and the run-up in oil prices over the last year because the CFTC data used for the report and the CFTC analysis is not that reliable.
The U.S. economy has been super fortunate to see oil prices drop over $50/barrel from its $147/barrel high after having been below $75/barrel a year ago. This unprecedented drop was due to an unprecedented and extremely unusual combination of factors. Factors such as a significant drop in oil demand, economies around the world on the verge of a recession making short-term big increases in demand unlikely, the banking and investment banking industries in the U.S. in such bad shape the likes of which haven't been seen since the 1930's Great Depression - curtailing credit to commodity investors, etc. The bottom line is the American people can't and shouldn't have to depend on extraordinary favorable events occurring to bring down petroleum prices the next time a massive increase occurs at the hand of speculators. The Congress and the President must pass soon legislation reforming commodity speculation so this nightmare situation doesn't occurr again.
