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« At your bidding | Main | On Summit Avenue »

Mar 12, 2008

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Wendell Sawyer

A made a post regarding this topic over on Joe Guarino’s blog yesterday.

One would think that gasoline prices would be declining since oil supplies are up and demand is declining. The Associated Press reported yesterday: "Analysts believe oil's underlying supply and demand fundamentals do not support such high prices..."

Unfortunately, speculators that are gaming on the so-called "oil futures market" are the ones responsible for much of the recent dramatic increases in the price of crude oil. A great number of these speculators are big investment companies, hedge funds and foreign investors. The problem is that approximately one-third of the energy futures exchanges are now not subject to the regulations of the Commodity Futures Trading Commission and escape any comprehensive audits by the agency. Without such regulation and oversight by an American regulatory agency, we may be witnessing the fruits of manipulation by big investment companies in the "oil futures market."

The free-for-all that exists today for the speculators in the "oil futures market" hasn’t always been that way. It all changed in 2001.

Noel Sheppard wrote a commentary about this topic for The American Thinker on August 9, 2006. He wrote: "The key here is that CFMA (Commodity Futures Modernization Act of 2000) allowed for the creation of electronic futures exchanges that would not be governed by the CFTC (Commodity Futures Trading Commission), and determined that energy futures and derivatives could be traded on such exchanges. In the view of this Senate report, this precipitated a tremendous expansion in the demand for energy related contracts — and the potential for manipulation by large investors around the world — that has likely increased the price of oil by as much as $25 per barrel."

It is interesting to note that our friends at Enron lobbied diligently for the passage of the CFMA.

I think that the time has come for Congress to amend the CFMA and subject ALL transactions in the energy futures markets to regulation and audits by the CFTC. Such action would certainly help American consumers of energy products and temper the gluttonous appetites of the speculators who are now gleefully playing at the gaming table of the "oil futures market."

Doug H

"...big investment companies, hedge funds..."

Aren't these some of the players that are being squeezed by the credit crunch? The credit crunch caused by the bursting of the real estate/sub-prime bubble?

Is a new bubble being created here? One that isn't regulated?

What will happen when this one pops?

Wendell Sawyer

Doug:

Good question. I’m not sure that many American consumers can wait and survive the severe economic hardship imposed if the crude oil price hits $150 or $175 a barrel before it breaks.

While supply and demand are always important factors in gasoline prices, Americans are now are caught up in a squeeze called 'contango.' NPR broadcast a story about this topic on 8/24/06. NPR said, "...other factors are just as important as the relationship between demand and supply. Chief among them is "contango," a market term for the situation in which a commodity -- like oil -- has a higher future value than its current price."

Unfortunately, “contango” creates a problem with the supply of oil (even if it is adequate) because of the "amount of oil that's being held off the market in storage. These analysts say the oil market has created big incentives to hold on to oil rather then sell it."

NPR continued, "Investment banks from Morgan Stanley to Goldman Sachs are making so much money from oil futures that they've become a hot investment for all sorts of big-money players.

"Some of the biggest players are U.S. pension funds, which have put billions of dollars into oil futures. At least one analyst thinks that pension funds have become part of the machinery driving higher gas prices."



Wendell Sawyer

I'm sorry, I don't mean to hog this thread, but I just finished reading an Associated Press story that was published today that supports my belief that the "oil futures market" is throwing the supply and demand balance out of whack and is threatening the stability of the U. S. economy.

According to AP: "...Oil prices initially fell after the Energy Department said crude and gasoline supplies rose by unexpectedly large amounts last week, but then they returned on their record-setting streak to briefly surpass $110 a barrel. If oil keeps hitting record levels, inflation pressures could rise and limit the Federal Reserve's ability to reduce interest rates further and boost lending efforts to spur the economy."

I think that Congress has no choice but to address the growing problems associated with the "oil futures market."

RBM

Not as much a problem as Mother Nature's Reality,

How adaptable is this species ?

Undercover Urbanist

Oil prices are right where they should be in a world where several of the largest exporters around the world experienced a decline in production in the world's largest oil fields, and unprecedented new demand in the developing world, particularly India and China.

The most important people to listen to on oil are not economists, they are physicists. Many of them hang out at www.theoildrum.com. The mainstream media is beginning to pick up the peak oil story, but they do not understand it well.

If you want to understand the world oil supply/demand situation and why oil prices have plenty of room to go up and not mcuh to go down, please take a read of the following post at The Oil Drum.

http://www.theoildrum.com/node/3726

I next expect someone to respond about how whiny environmentalists are keeping us from exploring here, there and everywhere and that will solve our problems. This could not be further from the truth. Even if we drilled all of ANWR in Alaska and got every drop out (not usually possible) of the highest possible reserve estimate for that area, we would get six months of USA oil usage. Six months. Of course, that will also be spread over probably 30 years of exploration, extraction and use. In short, we wouldn't even notice its introduction to the market.

If you want to play financial defense, then

1. Buy more fuel efficient cars, get rid of your gas guzzlers.
2. Learn to walk, bike, or use the bus to get around.
3. If this is not possible, move to a walkable neighborhood with stores and shops. If you don't know if your neighborhood is walkable, visit walkscore.com and put in your address.
4. Buy gold.

Wendell Sawyer

CNNMoney.com reported yesterday:

"The government said gasoline stockpiles are well above average for this time of year.

"'The big number is the build in gasoline,' said Stephen Schork, publisher of the industry newsletter the Schork Report. "We usually see a 2 million barrel draw at this time, not a surplus."

“Since September, gasoline stockpiles have increased from a 16 million barrel deficit to a 22 million barrel surplus, which Schork believes is due primarily to the continuing low demand for gasoline.

"Typically, an increase in supply and low demand would result in much lower crude prices. But crude and gas prices continue to rise.

"'This is all driven by speculation,' said Schork, who believes that investors have poured money into the commodity to make some interest in a slumping economy. "That's why we've seen a jump from 20,000 to 90,000 contracts this month."

Undercover Urbanist

Yup, I read that, too. Notice it's all short-term, day-trader oriented information based on stocks and supplies in the timeframe of months and weeks. Gas prices have risen, on average, 50 cents every 15 months for the last 6 years.

From a physical or geological viewpoint, of small proportions, say decades, we are facing serious challenges.

Again, try reading the Oil Drum, or listen to Republican Investment Banker Matt Simmons who was on the Bush-Cheney energy transition team in 2000.

http://www.simmonsco-intl.com/research.aspx?Type=msspeeches

In terms of today, or the next few weeks or months, the "correct" price of oil may or may not be closer to $70-85 than $100, but it's not a $55 commodity bid to ridiculous heights by speculation.

We'll see $130/barrel before we see $70/barrel again.

Wendell Sawyer

I read the analysis that you referred to on the Oil Drum website. It is impressive. But, I wasn’t addressing the issue of the diminishing supply of crude oil and the long-term prospects of increasing prices for energy products. My concern is the current surge in gasoline prices when the supplies are building and the demand is declining. I believe that the price of gasoline should reflect the ongoing supply and demand of the energy product rather than price swings based on the speculators gaming on the "oil futures market" or, worse, manipulation by big investment companies.

Hopefully, we may finally be getting some relief. In December of 2007, an amendment to the Farm Bill was unanimously adopted by the U. S. Senate that would close the so-called "Enron Loophole." Since 2001, this loophole has permitted electronic transactions by speculators gaming in the energy futures markets to escape regulation and oversight by the Commodity Futures Trading Commission (CFTC).

Jim Hamilton posted an interesting commentary about this amendment on his blog, Jim Hamilton’s World of Securities Regulations. I provide the following excerpt: "The legislation will put an end to the Enron-inspired exemption from government oversight now provided to electronic energy trading markets set up for large traders. By ending that exemption, this legislation will restore the ability of the CFTC to police all US energy exchanges to prevent price manipulation and excessive speculation

"The legislation also increases transparency in energy markets to deter traders from manipulating the price of oil and natural gas futures traded on electronic markets. It requires energy traders to keep records for a minimum of five years so there is transparency and an audit trail. It requires electronic energy traders to report trading in significant price discovery contracts to the CFTC so that the agency would have the information to effectively oversee the energy futures market. Manipulators could then be identified and punished by the CFTC.

"The bill gives the CFTC new authority to punish manipulation, fraud, and price distortion. It requires electronic trading platforms to actively monitor their markets to prevent manipulation and price distortion of contracts that are significant in determining the price of the market..."

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