Posted on 06/09/2008 1:23:15 PM PDT by PeaceBeWithYou
The dramatic surge in oil prices—including a $16-per-barrel jump in just two days last week—has left Washington regulators scrambling to exert new oversight on futures trading in oil and other commodities. The U.S. regulatory agency's abrupt shift toward more rigorous oversight in the past two weeks also represents a stark example of how the pinch from high gasoline prices has changed the political landscape and made energy traders prime suspects in congressional inquiries.As recently as May 20, the U.S. commodities regulator, the Commodity Futures Trading Commission (CFTC), insisted at a Senate hearing that speculation was not causing the rapid spike in energy prices. The CFTC's chief economist, Jeffrey Harris, testified that the agency found that speculation and manipulation are not causing energy prices to surge. He said that instead prices are being driven "by powerful economic fundamental forces and the laws of supply and demand." Nine days later, after further pressure from Congress, the agency announced steps aimed at more oversight of energy futures trading.
Among the measures:
• A new information-sharing agreement with Britain's commodities regulator, the Financial Services Authority (FSA), to gather information on large positions of the benchmark West Texas Intermediate (WTI) contract.• A proposal to consider reclassifying investment banks such as Goldman Sachs (GS) and Morgan Stanley (MS) as speculators, which would subject them to trading limits from which they're currently exempt.
• An investigation of the crude oil trading market dating to December, 2007.
(Excerpt) Read more at businessweek.com ...
And it pert near brings down the entire global financial order in the process.
“So you think the Hunts trying to corner the silver market and driving the price to $48/oz was a good free market thing?”
Yes, it worked fine. The highly leveraged Hunt Borthers were unable to meet their margin calls, and were forced to sell. The price of silver fell dramatically; on March 27th 1980 the price fell 50% in one day, from $21.62 to $10.80. The Hunt Brothers were forced to declare bankruptcy. Bache Group, which handled of the trades for the brothers, was financially ruined.
Too bad, so sad. Market worked.
Sounds like they need to go broke.
The rule of law is ever the conservative touchstone. The relief from the arbitrary application of power is the Whig tradition that began it all.
Law, transparent conduct, and steady, infrequently changing regulation can be simple Order.
Government planning and planned outcomes for enlightenment goals is the liberal extreme and that is Hayek's message as well.
Free Markets never meant rapacious markets.
Could the OPEC posers do the same a Bunker Hunt and his brother. Probably not in the long term as production is more on going than in the finite supply of silver. But, in the short term....I worry about that.
And should they do anything it will only make matters worse. As a group, Congress, is just a bunch of incompetents. Most of them could not find their way out of a paper bag.
Pffft!!! The only people who are going to get "hosed" is the American Taxpayer.
In June, the Federal Reserve will lend more $225 billion through its Term Auction Facility. The TAF will auction off $75 billion worth of 28-day loans on each of three days: June 2, June16 and June 30. The loans are auctioned so that banks themselves set the interest rate for the loans, not the Fed. Through the auction, banks can avoid using the Fed's discount window, which could be seen by the banking community as a sign that they have a lot of subprime mortgage debt on their books. (Source: Federal Reserve Press Release, May 29, 2008)
This will bring the total to $1.2 trillion that the Federal government has pumped into the financial markets as a result of the Subprime Mortgage Crisis. For a complete rundown of all the Fed interventions, see Federal Reserve and the Banking Liquidity Crisis.
What It Means to You
In all likelihood, the Federal government's actions have avoided a financial meltdown. Although it is possible that the economy is already headed for a recession, it will be less painful than if the government had done nothing. However, the Fed is warning that the financial markets seem to be becoming dependent on the Fed for short-term lending, and that they need to resume lending to each other. As I have said before, the problem is not one of liquidity, but of trust. Banks are not willing to lend to each other because none of them want to get stuck with bad sub-prime mortgage debt.
However, if Fannie Mae, Freddie Mac, the Fed and the Federal Home Loan Banks get stuck with the $1.2 trillion in bad debt, then this will cost taxpayers more than ten times as much as the Savings and Loan Crisis, which "only" cost the taxpayers $124 billion.
Even if this worst case scenario does occur, the net result is that this debt would get added to the $9 trillion national debt. This would contribute to a chronic situation that has depressed the dollar and raise the price of imports.
Did you read the article?
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“What’s been happening since 2004 is very high prices without record-low [oil] stocks. The relationship between U.S. [oil] inventory levels and prices has been shredded and become irrelevant.”
— Jan Stuart, Global Oil Economist, UBS Securities
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“What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side.”
— Tim Evans, Senior Oil Analyst, IFR Energy Services [From testimony: U.S. Senate Permanent Subcommittee on Investigations’ report, “The Role of Market Speculation in Rising Oil and Gas Prices,” June 27, 2006]
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“In the past, the Commodities Futures Trading Commission acted as the cop on the beat, ensuring that buyers in the market were not distorting or manipulating prices beyond what supply and demand normally dictate. Certainly, if a hard frost hit Florida and cost growers an orange crop, then bidding up the price of the remaining oranges was both a wise investment and allowed under the trading rules. Right now investors know that if they borrow and invest huge amounts in commodities futures, they can create a shortage on paper – which drives prices up just like an actual shortage of any given product would. What kept traders from cornering the market that way in the past were the government’s anti-manipulation rules.”
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Read the article then we’ll talk.
Enron Part Deux
I think you are right.
Except the difference between silver and oil is that oil is MUCH more vital for our daily existence. Some of the speculators will get singed in the end. But in the meantime people are getting hammered economically by their actions. The economy grew just fine during the years after a few basic regulations were put in place to prevent another Hunt-style action. Those regulations have since been allowed to be circumvented. Which led to Amaranth in 2006 and the mess we see today in the oil markets.
Simply removing the investment banks from being classified as commerical entities in the commodities markets will go a long way towards getting those markets back to their intended purpose.
“Pffft!!! The only people who are going to get “hosed” is the American Taxpayer.”
Yes, because of regulation and laws that supported the lenders and removed the investment risk from the lenders, to be born by taxpayers.
In short, laws & regulation CAUSED the imbalance in the market and the problem.
YES! You’re right.
Yes, it sounds like a short-term blip, and these guys will get nailed when the market catches up to them.
I am just a redneck oil driller (I own rigs used to drill up fields), but I do note that people who actually are in the oil business buy, sell, borrow, and lend based on $70/bbl crude.
... because regulations were changed, requiring margin requirements to be raised, which is what you're objecting to in regards to investment banks.
Yeah, Amaranth took a billion-dollar bath in the end. But at what cost to users of natural gas during two years of market manipulation?
“But at what cost to users of natural gas during two years of market manipulation?”
Markets always go too high and too low by nature.
Save up your extra pennies when it’s too low because you’ll have to spend too much when it’s too high.
Not in this case by nature, but by manipulation.
This is a conservative web site, not a libertarian web site. I have to constantly remind myself of that since I am a conservative-libertarian. Libertarians are for minimal laws and would be against over regulation. Conservatives are for sensible conservative regulations and laws. As others have pointed out, the problem right now is that speculative fund managers are basically gaming the system and trying to make money being speculative about commodities. Late last week after oil had dropped some, they doubled down on oil. You simply cannot see oil rising as much as it did on Thursday and Friday without speculative collusion. Yes the Israelis did state that they would attack Iran, but everyone knows that is coming. The price in oil began rising before their statement anyway.
Thanks for the info.
Bloomberg showing oil down 3.74 as of now.
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