Posted on 06/10/2008 1:16:00 PM PDT by 11th Commandment
WASHINGTON (AP) -- As spiking fuel and food prices rattle markets and consumers worldwide, the U.S. government on Tuesday formed an interagency task force to assess developments in oil and other commodity markets.
The task force is comprised of staff from the Commodity Futures Trading Commission, the Federal Reserve, the Securities and Exchange Commission, and the departments of Treasury, Energy and Agriculture. It will examine oil supply and demand factors, investor practices and the role of new players in the markets, such as speculators and index traders, according to a CFTC release.
With gasoline prices exceeding $4 a gallon, government policymakers and members of Congress are straining to find solutions.
"High commodity prices are posing a significant strain on U.S. households, and the (new) interagency task force will aid public and regulatory understanding of the forces that are affecting the functioning of these markets," the CFTC said in the release.
(Excerpt) Read more at biz.yahoo.com ...
However, there is a new breed of traders out there that have found loop holes in the rules and can control too much of the trading. Combined with the fact that they are holding product (traditional traders rarely take delivery of commodities), I hypothesize that index traders are influencing the price of oil and many other commodities upward.
I haven’t been able to confirm my research, but if the whistle blowers on index traders are correct, they hold more oil than the US reserve supply as reported by the EIA.
However, at the end of the day, index traders are in business because the lack of courage by our leaders to explore for more oil.
If the democrat congress decides to clamp down on traders and institute new and harsh regulation, how hard would it be for the portion of commodities trading that occurs in America to be moved elsewhere, thus avoiding the grasp of US regulators and congress?
Talk is that this is currently underway. The commodities and portions of the NYSE are being moved to London.
If the US had more energy options wouldnt speculation be curtailed?
Yeah there could be shortages in the worst case scenario, but considering our addiction and income American distributors will probably just attach a premium to pay for the costs imposed by regulation.
The “speculators” are mostly just reacting to the lead of America’s monetary policy and China’s mercantile / imperial commodity acquisitions: An inflationary piece of paper can’t compete with a limited resource that nations are willing to send their military after
AGREED- see my last sentence of my post!!! However, I am struggling/troubled with all the corn, wheat and other ag products the index traders are holding.
The “Task Force” is already doomed to failure.
1) It is a beaucrat dream. When was the last time the goverment solved anything?
2) It is a paper tiger that will ‘study’ the problem but has not method to fix the problem.
3) Just like previous task forces, millions will be spent and nothing will change. To save time, just refund the taxpayers the amount you will waste on this ‘study’ to pay for gas.
Not necessarily.
The root cause of the speculation in energy is the “Enron Loophole” as it is known, one of the byproducts of the Commodities Futures Modernization Act of 2000 (sponsored by Phil Gramm, R-TX).
Since this deregulation of energy and financial futures/derivatives products, we’ve had:
1. Enron successfully manipulated electrical futures prices on the west coast.
2. Amaranth successfully manipulated the price of natural gas futures.
Neither product was in short supply. There was a perception of shortages, but as it turned out, there really were no shortages and no supply/demand imbalances that led to the huge spikes in prices.
The problem stems from the differences in how US exchanges, foreign exchanges with a US presence and electronic exchanges (eg, ICE) are treated.
You may want to go back and recheck your facts on that one. Amaranth was the hedge fund that imploded and dissolved in 2006 because they bet entirely wrong on natural gas futures.
I may have a simplistic view of futures contracts but it seems to me that it is essentially a zero sum game in the sense that you have one party betting that the price will go up and another betting it will go down. Now for one of the parties it is not zero sum - if the bet is wrong is could be an infinite loss. But from the perspective of gasoline consumers - the existence of a futures market in gasoline (or oil) should be of no consequence. It allows large entities (e.g., United Airlines) to hedge against dramatically higher fuel costs in a given future period. And it would seem to act to smooth extreme fluctuations in the spot market.
If the futures contract has to have one party buying and one party selling ( essentially betting in opposite directions on the price of the underlying commodity) why does margin buying of contracts lead to increased upward pressure on the underlying commodity price? My thinking is that it would be symmetrical, i.e., it would have no influence on the underlying commodity price. Can anyone out there help me on this?
I have my facts: Hunter (and Amaranth) were charged with market manipulation by the CFTC. The CFTC is seeking to have Hunter and Amaranth pay $291 million in damages and fines, plus Hunter and Amaranth filed a motion to dismiss the charges.
A federal court has denied his motion.
The case is going forward:
http://www.hedgeweek.com/articles/detail.jsp?content_id=254561
http://www.cftc.gov/newsroom/enforcementpressreleases/2008/pr5502-08.html
NB the involvement of using trade on ICE, which are out of sight to the CFTC. That’s exactly what oil traders are doing today. Look at the volume of WTI contracts on ICE since 2007... when this tactic became public.
IMO, people need to start thinking like hedge fund managers. They’re constantly trying to game the system with leverage, derivatives and clever arbitrage between exchanges, countries and currencies.
Think like Enron. Do you know how Enron played California on electricity? It was oh-so-clever.
Enron would offer to sell California electrical power — but they’d try to schedule the delivery on a puny 69-kV power line that ran across central Nevada and tied into California on the east side of the Sierras. Obviously, this line couldn’t handle much power, so the scheduling software would reject the physical delivery of power on this line, but the price for offered power would go through the roof because the transmission costs would go up, and the power being “bought” never arrived, so the California grid operators kept seeing a shortfall.
FWIW, I know the 69kV line in question — it is located only about 40 miles west of the farm we used to own in Nevada. When I learned of how Enron gamed the system, all I could think was “Ohhhhh... that’s darned clever of them.” That little 69kV line was never meant to wheel power between states; it was intended to serve a mining operation that had large power requirements.
But it was illegal, deliberate and caused real harm to power users in CA, and caused Nevada to abort their deregulation process, leaving the two investor-owned utilities in financially precarious configurations, which has resulted in large rate increases to make them whole.
Oh, and you want this URL - sorry for omitting it the first time:
http://www.cftc.gov/newsroom/enforcementpressreleases/2007/pr5359-07.html
NB the “See Also” links on the right hand side, which take you to the court filings.
The same people who make up the existing regulatory boards already. Don't expect a lot of fresh idea.
One more link for you, which is dense reading, but spells out what Amaranth did, and why, from the actual complaint:
The operative thing to remember here is that they were seeking to manipulate price to their benefit on swaps, not outright contracts.
This is what I think folks aren’t understanding here: we’re long past the point of some big trader trying to run a corner. That’s so early 20th century now.
With the advent of ICE (and other exchanges) that don’t report positions to the CFTC, you can play contract prices on the CFTC-regulated NYMEX and then run a play on ICE (or other OTC electronic exchange), and use swaps and derivatives to capitalize on the price movements between contracts.
Amaranth blew up because they had accumulated such a huge position in NG futures on margin. When things turned against them, JP Morgan started wanting to call, and then the house folded in.
There’s also a Senate report that includes more details of Amaranth’s actions, if you’d like me to forward that.
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