In an amazing change of direction, the US is considering market intervention for speculative buying of energy futures. Hang on, I thought the act of participating in the market was speculative to start with?
Reacting to the violent swings in oil prices in recent months, federal regulators announced on Tuesday that they were considering new restrictions on “speculative” traders in markets for oil, natural gas and other energy products.
This comes at a time when those in the markets are willing to place the blame on anything, two years ago people would have been saying, “keep your hands off”, now they are saying things like…
“It is the regulatory authority’s business to make sure the markets work,” said Edward L. Morse, head of research at LCM Commodities, a brokerage in New York. “If there’s a lesson of that last few years, it’s that the markets haven’t been functioning as well as they should have been.”
Analysts said regulators face huge challenges in distinguishing normal volatility, which is always high during a chaotic economic period, from speculative swings propelled by investors seeking purely financial gains who end up distorting energy prices.
[ad#200-left]Does this show how screwed up the market is when someone who is betting that the price will go up buys more and as a result – the price goes up? Then, when the rest of the players realize that there is a glut of the product in storage, the price drops back down. Interestingly, the idea of general investors speculating in oil futures is an extremely new phenomenon…
Prior to 2005, mutual funds and retail investors looking to invest in oil did so by buying the shares of oil producing companies. The volatile futures market was left as a preserve of actual oil producers and consumers looking to hedge their exposures, and to a handful of cowboy hedge funds and individual speculators who provided liquidity for such trades to occur. Futures were deemed too risky a proposition for mutual funds and too scary for most retail investors.
But with the introduction of exchange-traded funds, fund managers and retail investors alike were effectively introduced to a new investment asset class. Traded on the stock market, commodity ETFs provided a proxy for direct commodity investment. In 2005, China was on the move and commodity prices were on the way up. Direct commodity investment became a more direct means of hedging against inflation, and of speculating on now rapidly rising commodity prices. Oil, as one commodity, became the speculative plaything of hedge funds and retail investors and a mandatory asset class for pension funds. The once steady and relatively closed shop of oil trading was suddenly opened up to the herd.
I’d love to hear what free market economists think of this one. Is regulation of the oil and gas futures market necessary. Considering these are products we should really be weaning ourselves off of – surely there is a better way to manage the problem of fluctuating prices, which inherently are caused by fear and greed. Any ideas?
Emanuel Balarie, managing director of Chicago-based Balarie Capital Management called the CFTC proposal “pretty vague’’ and said “speculation is what makes markets efficient.’’
The volatility of oil trading is not likely to to go away with heavy handed regulation, more feasible is increasing prices, decreasing supplies and a nervous public that waits for the government to do something serious for them regarding our oil vulnerability.