Recent stuff from CNN on energy trading and a probe into possible manipulation of oil prices (my emphasis/comments in red). An interesting snippet:
"But Beutel doesn't blame these funds for wanting to diversify their portfolio by investing in oil. If anyone is to blame, he says, it's the Federal Reserve, which has been predictably cutting interest rates since September to shore up credit markets. When interest rates fall, investors flock to commodities as an inflation hedge. "The Fed tipped their hand," he said. '[The big funds] were basically told by [Fed Chairman Ben] Bernanke that this is where the money is.'"
http://money.cnn.com/2008/05/30/news/economy/oil_cftc/index.htm?section=money_latestOil trading probe may uncover manipulation
But overall, any wrongdoing is likely to play a small part in soaring crude prices. Meanwhile, speculators aren't expected to hang.
NEW YORK (CNNMoney.com) -- Amid soaring oil prices that some say are caused by nothing more than rampant speculation, the government Thursday announced a wide ranging probe into oil price manipulation and said it would get more information on the effect investors are having on the market. The measures, undertaken by the Commodity Futures Trading Commission after pressure from angry lawmakers, do two things. First, they'll attempt to gather more information from index funds and other non-commercial users of oil. They'll also seek information on oil trades made outside the U.S. on exchanges like the IntercontinentalExchange Europe (ICE) where the CFTC has no oversight and has been unable to get more detailed information.
The second thing on the CFTC's agenda is an actual investigation into possible price manipulation - most likely by a commercial user of oil like a production company, shipping company, or storage company.
Recent investor interest in commodities is an issue of intense debate. Some say investors, who have been funneling money into oil and other commodities over the last several months amid rising inflation and falling stock prices, are unjustifiably driving up the price of oil and gas simply because they have no other place to put their money. Others say tight supply and strong demand are the real reasons behind this investor interest, and the market is functioning properly to limit demand and increase supply. CFTC has previously said that it has not found any evidence that speculators were artificially inflating prices.
"Data used by Commission staff show that price changes are largely unrelated to fund trading," according to written testimony before a Senate hearing earlier this month by CFTC Chief Economist Jeffrey Harris. "Broad-based manipulative forces are not driving the recent higher futures prices in commodities across-the-board."
Neither Harris nor any other economist at the CFTC could not be reached for comment. According to a chart presented in its congressional testimony it appears the CFTC used data from 2007 to reach its conclusion. But he said oil traders see this request for additional information as perhaps a precursor to broader regulation, like increasing the amount of contracts speculators are allowed to hold or raising the amount of money investors have to put down to buy those contracts. "The fear that this might happen may drive people out of the market," he said. "There could be a run for the gates."
Oil prices fell Thursday by over $4, one of the biggest declines in recent weeks. One expert attributed the slide to the investigation. "The traders now know that someone is looking over their shoulder," said Michael Greenberger, a professor at the University of Maryland and a former CFTC official. "Their phony sales are being watched, and in one day there was the biggest drop in 2 1/2 months." [If their trading is all legit and not manipulating the price, then why would they run for the hills at the first mention of "regulation"?]
If there is a run for the gates, he said prices may or may not fall, but liquidity would be reduced, leaving the market more vulnerable to manipulation by a single participant. And that's the second thing the CFTC is looking into - "practices surrounding the purchase, transportation, storage, and trading of crude oil and related derivative contracts," the agency said in a statement.
This most likely means manipulation of the physical oil market, not typically done by speculators but rather by commercial players who might literally withhold oil from the market in an attempt to drive prices higher. The CFTC has found evidence of this in the past. BP recently settled a suit that alleged the company tried to corner the propane market to inflate prices in 2003 and 2004. BP agreed to pay a $303 million settlement. Haigh thinks it's likely CFTC will find evidence of this again given that the agency has been investigating for six months and has now chosen to make it public. But he stressed that a single player acting alone would in all likelihood not have a huge influence on prices. [Well, even if one or a few greedy bastards won't seriously impact prices, an example has to be made that such conduct is unacceptable]
"This investigation is just a way for the government to divert attention away from the fact that it hasn't created a viable energy policy," said Mike Fitzpatrick, an analyst at the brokerage MF Global in New York. "Ultimately, fundamentals rule the markets...this investigation is going to wind up producing nothing."
Not everyone agrees fundamentals rule the market. "There is a theory that the price of crude oil is being driven up not by supply and demand principles, but by speculators using what are called dark markets, markets that can't be watched by the public or regulators, to manipulate the price of crude," said Greenberger.
First Published: May 30, 2008: 2:57 PM EDT
Oil prices: Wall Street's gameIs $130 oil a bubble?Oil prices: Wall Street's game
Big fund money is flowing into oil markets sending prices to levels never seen before. Is it profiteering or an essential way to ensure supply?
NEW YORK (CNNMoney.com) -- There's no question about it: A new breed of speculator is pouring money into the oil market. What's less certain is whether this new money is responsible for driving up prices or essential to a healthy market. Many blame record prices on Wall Street investors new to the oil market, saying they're bidding up gas prices to artificially high levels - and soaking drivers. As oil nears $130 a barrel, some say $10 to $70 of that price is due to Wall Street speculation.
But that's not the whole story. Nearly everyone agrees that speculators have always been essential to a functioning market and that oil prices could be much higher without them. What's harder to understand is the effect of new speculators flowing into commodities from big-money funds like university endowments, pensions and indexes. Some say they're a good influence. In addition to limiting demand, they make it easier to sell oil contracts and create a larger market where prices are less susceptible to big swings following individual trades - known as liquidity in financial speak. This camp says $130 oil is justified since demand is rising faster than supply.
Others say big-fund money is making it harder for traditional oil speculators to do their job. This camp says big funds distort traditional models used to predict prices and think $130 oil is a bubble ready to pop.
Traditionally, a futures speculator bets on the direction of commodity prices and then guarantees that commodity at that price to a client. This removes some of the risk - and greases the wheels of commerce. Speculators originated in the food market, and were intended to give farmers a set price in the spring to buy seed, according to Peter Beutel, an oil analyst at Cameron Hanover. For example, a speculator would offer a farmer $3.50 in April for a bushel of corn to be delivered and paid for in October - these are called futures contracts. The speculator hopes that by October corn will sell for $4, and he'll make money. The farmer can plant his fields certain that he's making $3.50 a bushel.
Conversely, a speculator might bet the price of corn will fall. He might offer to sell a bushel to a corn bread maker at $3.50 in April for corn to be delivered in October. If corn falls to $3 by October, the speculator comes out on top. The deal allows the bread maker to make long term business decisions, like how many employees to hire. Without this transparent marketplace, uncertainty would be priced into the product, resulting in higher costs for everyone. Although the lines between producer, consumer and speculator have been blurred in recent years, this same dynamic is at work in today's oil and gas markets.
"We're trying to get some type of cost certainty," said Brad Samples, a commodities analyst at Summit Energy in Louisville, Ky. Summit buys energy for clients who use lots of it. One client, Samples says, goes through about $15 million a year in diesel fuel, and it's Samples' job to make sure it gets a good deal at a consistent price.
When Samples buys a contract, he needs someone to sell it to him, usually a bank. To manage the financial risk, the bank will go out and sell that contract to someone else - in other words, a speculator. Sometimes that person might be someone like George Zivic, managing partner at Almanac Capital, a commodity investment firm. For him, the influx of big-fund money betting oil prices will move in one direction - in this case up - into the commodities market is a challenge. Before the new money, price movements were more predictable. For example, in the spring gasoline usually rises in tandem with crude, and Almanac and other related firms would look to make their money by betting on the difference between the two.
This year that hasn't happened - oil prices have greatly outpaced gasoline - and that's made making money in this market more difficult. He blames some of the schism on big-fund money betting oil prices will only go up. "When you have directional money, it makes the historical relationships distorted," he said. "There's no short term shortage of oil. $127 a barrel doesn't make sense."
Beutel, from the consultancy Cameron Hanover and a former NYMEX floor trader, goes even further in blaming big-fund money. "We want to see them out, they have no respect for our markets at all," he said.
But Beutel doesn't blame these funds for wanting to diversify their portfolio by investing in oil. If anyone is to blame, he says, it's the Federal Reserve, which has been predictably cutting interest rates since September to shore up credit markets. When interest rates fall, investors flock to commodities as an inflation hedge. "The Fed tipped their hand," he said. "[The big funds] were basically told by [Fed Chairman Ben] Bernanke that this is where the money is."
And if the money is there, why wouldn't the big funds take advantage of it? "We are following for us what is a prudent strategy to maximize investment returns, said Clark McKinley, a spokesman for CalPERS, California's pension fund for workers in the public sector. "Obviously, there's some unintended consequences."
Not everyone agrees big-fund money is playing a role in driving up prices, starting with the Commodity Futures Trading Commission, the government's own regulatory agency. Economists at the CFTC have testified that after studying all the numbers on who is trading what, there is no evidence speculators of any kind are significantly driving up the price of crude. 'You can't just point the finger at speculators," said Michael Haigh, head of U.S. commodities research at the investment bank Société Générale and a former economist at the CFTC. "Fundamentally, the markets are where they are supposed to be."
Haigh said that big-money funds are not just dumping their money onto the market - only betting prices will go up. He and others say these funds are sophisticated investors and take a variety of positions in the market. Deutsche Bank took a somewhat novel approach in investigating the role of speculative money. Analysts there looked at the price of commodities that do not trade in a futures market and came to basically the same conclusion. "The rally in non-exchange traded commodity prices since the end of 2002 has been similar if not greater in magnitude," the bank's analysts wrote in a research note. "We believe this refutes the claim that speculators have been the primary drivers of rising commodity prices during this cycle."
Members of Congress, their ears bent by angry motorists paying nearly $4 a gallon for gas, are considering increasing the amount of money investors have to put up front in order to buy oil futures. Some say this may work, as a lot of the investor interest in commodities is due to the fact that they can essentially gamble with a million dollars worth of oil by putting up $100,000 or less of their own money. In the stock market, they'd need to put up $500,000. But others say increasing these requirements - known as margin requirements - would merely drive oil trading into less regulated markets where information would be even harder to track.
The motorist organization AAA doesn't have an opinion on what Congress should do. But like many American drivers, they've certainly noticed that oil prices have shot up $50 a barrel since August at the same time that the stock market tanked, while the supply and demand picture for oil remained little changed. "After Israel invaded Lebanon, Hurricane Katrina, 9/11, all of these situations, we haven't seen prices rise to these levels," said AAA spokesman Geoff Sundstrom. "We have to wonder if the foundation behind these very high prices is nothing more than speculation."
First Published: May 16, 2008: 3:58 AM EDT
Why $120 oil is goodDrilling for oil in the Arctic
