CFTC May Limit Energy Speculation

I believe that investment funds have had a disproportionate effect on commodities markets over the past five years.  Restrictions on the holdings of commodity futures and swaps by investment funds could have an enormous effect on commodity prices and the stocks of commodity companies as well as resource-based economies if the US government restricts trading in commodity futures.

From Bloomberg

U.S. regulators say they may clamp down on oil and gas price speculators by limiting the holdings of energy futures traders, including index and exchange-traded funds.

The Commodity Futures Trading Commission will hold hearings to explore the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets, Chairman Gary Gensler said today in a statement. The agency didn’t say when the hearings would start or who would be asked to testify. ...

“Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products,” Gensler said in the statement. “This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.” ...

Gensler said in a letter to lawmakers earlier this year that speculators contributed to an asset bubble in commodities in 2008. His statement broke from former CFTC Acting Chairman Walter Lukken, who testified to Congress on Sept. 11 that there wasn’t “strong evidence” index traders were driving up prices. ...

“The CFTC currently sets and ensures adherence to position limits with respect to certain agriculture products,” Gensler said in the statement. “For energy commodities, futures exchanges set position limits and accountability levels to protect against manipulation and congestion. The exchanges are not required to set and enforce position limits to prevent the burdens of excessive speculation.”

The chairman said the CFTC is reviewing exemptions from position limits for “bona fide hedging,” after seeking public comment on whether the exemption should continue to apply to traders who are in the market for financial reasons, rather than those that actually use the commodity.

Gensler also said the agency was going to improve its weekly commitment of traders’ reports by separating swaps dealers from hedge funds. The agency will continue to collect and report data from swaps dealers and index investors, extending a “special call” from last year, Gensler said.

If this goes into effect, one must consider the secondary and tertiary effects that would certainly come into play.  What would happen to the Canadian dollar? How would that effect the US consumer?  Do you still want to speculate in Calgary real estate?  Would funds pull all their commodity investments out and what would happen to base metals prices?  Such a decision could be wide-ranging.

I am short oil.

Comments

[psychodave]

"I am short oil."
Thanks. Always good to read your thoughts.

"the CFTC is reviewing exemptions from position limits for “bona fide hedging,”"
Hard for me to believe they will make any drastic change to the participants trading under this exemption. That part of the market is the one I believe to be most significant, viz. Gov't Sachs.
Any change might threaten profitability of the Fed's Core Constituency...(hint:that's "bad", at least in some circles).

[RunningAmokInFantasyland]

psychodave re Gov't Sachs:

Did you catch the Rolling Stone story on GS? The author is now looking for a condo in S. America...the mountainous part.

[psychodave]

re:"Did you catch the Rolling Stone story on GS?"
Yes, it's been all over zerohedge.com, which is easy to get to from here thanks to our gracious host

aside: Toro, update the link to reflect the new URL.

Meantime runningA, I've enjoyed re-reading your comments in Toro's absence. Giant squids and sea turtles (Jack Sparrow, a true pirate) back at ya.

Now, if only the smart "dave", kerry and Toro would show some ankle (make an appearance), we could make the TriFecta today.

[RunningAmokInFantasyland]

@psychodave
"it's been all over zerohedge.com"

Hmmm...I picked it up on Drudge (and it wasn't up for long).

When I need the most dated insights on financial legerdemain, I go to Matt The Hat.

No relation to Tommy The Hat, late and great manager of the long gone 7-11 pool hall on Broadway, NY, whose sobriquet reflected the inferior quality of his toupee.

But it was Tommy who taught P. Newman how to pass as a hustler in the film of the same name. Mosconi couldn't teach a five-year-old how to tie his shoelaces. Nor would he bother.

[dave]

comrade psycho,

Don't know whether you were beckoning me since the only one who thinks that i'm smart is my Aussie because when she brings me her leash i think that maybe she wants to go for a walk.

Posted this elsewhere (and other elsewhere even earlier)

Dave
Jul 7th, 2009 at 1:36 am

Although the SPX hasn’t broken its H&S neckline OIH & XLE may be better leading indicators.

A USDollar bounce will put pressure on commodities & therefore the SPX will be weaker than the Nasdaq. OIH & XLE have already broken necklines on H&S patterns. I think the XLE is particularly vulnerable because its neckline is downward sloping.
http://www.tradersnarrative.com/head-shoulder-formation-in-major-indexes-2727.html#comments

Not super bearish; just .382. If i'm not the "dave" that you were summoning, then Emily Litella. Btw, i confessed under "Correlations at All-Time Highs" & they wouldn't allow me even one phone call first.

Regards,

dave

[dacian]

Regarding GS story, here is an interesting video with Robert Craigs, former assitant for US Treasury

http://globaleconomicanalysis.blogspot.com/2009/07/craig-roberts-former-assistant-treasury.html

"Max Kesier: Does the treasury secretary work for the people or does he work for the banking system on Wall Street?

Craig Roberts: He works for Goldman Sachs."

Very nice indeed :)

Regarding this speculation on commodities, there are arguments from both sides. Speculators provide liquidity they say (which can be acceptable) but they are not always interested in fundamentals but rather in volatility and things like that (so intense speculation distorts prices and affects many people who can't afford buying like before). It depends I guess on what side of the story you are :)

I have no clear opinion on the problem; why not let speculators buy shares of companies producing those commodities instead of letting them bid on the commodity itself? I think the current crisis has little to do with speculation and more with the fraudulent environment perpetrated for years by bankers, governments, etc.

[dacian]

Oh and btw...

The vertical move in oil last year to 140$ and the rapid move back to 36$ in such a short amount of time it's very good prove on how intense the speculation was and had nothing to do with supply/demand. I remember that increase in price forced many small transportation companies to stop their activity and fire people; that affected the lives of quit few, which is sad...

[psychodave]

@dave
Caught your confession, that's why I mentioned your name, hoping to provoke response.

@dacian
Thanks for the link, I enjoyed it very much.

@Amok
Re: "most dated insights on financial legerdemain", would that be "stale as last year's milk" or "up to date"?
1) This ("http://www.myspace.com/matthehat") can't be right, but it has such a resonance with some of TurboTax Timmay's speeches .... hmmm.

[dacian]

Here is an interesting story (GS strikes again :)) you guys know. Back in 2008 there was this company called SemGroup, which was heavily trading in oil market but went bankrupt. Here is how and probably why.

http://www.forbes.com/forbes/2009/0413/096-sachs-semgroup-goldman-goose-oil.html

Very interesting indeed.

[dave]

"The vertical move in oil last year to 140$ and the rapid move back to 36$ in such a short amount of time it's very good prove on how intense the speculation was and had nothing to do with supply/demand."

The word "speculators" clouds the issue of what institutions like pension & college endowment funds did. We should come up with a more appropriate word because speculators aren't THAT dumb.

"Speculators" is an emotionally charged word that makes locals in Chicago & NY get defensive about their roles (& rightly so because it wasn't them). Speculators' palms face inward & outward.

Love to hear some feedback.

Palms out...for now.

[dave]

anchovies & dominos

http://news.yahoo.com/s/ap/20090709/ap_on_sc/us_sci_el_nino

[dave]

While i am .382 bearish & positioned as such, i would prefer a false H&S breakout & bear trap because it's what the mkt is least prepared for. And like the speculator that i am, the ensuing volatile move would be preferable. So unlike Steve McNair, i'm sleeping with one eye open.

Regards,
dave

[dacian]

dave, actually I read plenty of blogs where people are prepared (and maybe positioned) for a "bear trap". Seriously!

I agree that when you see H&S technical analysis on marketwatch.com, it has few chances to fulfill :)

[dave]

@dacian,

I understand where you're coming from. However, there are "talking" bears & there are "selling" bears. I still sense that the mkt is less prepared for another move up (more than a bounce). Frankly, i don't give a spit; i just want a "move" in either direction.

Regards,
dave

[Toro]

I covered my short in oil this morning. Crude fell nearly 20% over 7 trading days, so I closed my position.

T.

[psychodave]

"I covered my short"
Thanks for the heads up Mr. T.

@dave
"So unlike Steve McNair"
OOoof! That was so cold ... (but quite good)

"Love to hear some feedback"
1) Anecdotally, I knew there would be a runup when Fed implemented PDCF. The idea of shoving cash, not just securities, into the hands of investment bankers screamed it at me. Nope, I didn't go long oil or gold (in trading, I'm Bullwinkle with the rabbit & hat trick ... "this time for sure, Rocky!"). Wife and I started carpooling, reduced gasoline consumption 60% overall. PDCF will be continued indefinitely (oh swell!).

2)"clouds the issue of what institutions like pension & college endowment funds did"
Can't speak to college endowments (e.g. Harvard) but pension funds are rigorously regulated, can't even buy lower rated missionary position fixed income. Could they really be big players in commodity futures?
Please set me straight.

Not that I know that much. I still can't tell my foreign friends who regulates the Wisconsin School Board's issuing Credit Default Swaps (SEC?, OTS?, OCC, FDIC? ... please, somebody help)

@dacian
"this company called SemGroup"
Maybe it's time for me to just buy annuities. Originally, the egregious blunder seemed to be Semgroup's ruining their correct short of oil by leveraging it so heavily they couldn't endure any volatility.

The lesson I now hope the world takes from it is to treat any "asset" from Wall Street, in this example the $430 million GS's subsidiary Aron owed Semgroup, as immediately in default, until further notice.

Oh, and along with "Never eat at a place called Mom's", our culture could try to add "Your 'Kick Me' sign is on securely when an Investment Bank is your counterparty".

[dave]

@psychodave,

"...but pension funds are rigorously regulated..."

http://www.businessweek.com/magazine/content/06_23/b3987080.htm June 2006

http://www.latimes.com/business/la-fi-calpers16-2009jun16,0,37882.story June 2009

I'll try to come up with more over the weekend.

Regards,
dave

[psychodave]

I'll be watching, and am already grateful for your trouble.

[dave]

@psychodave,

"...but pension funds are rigorously regulated..."

Unlike in past decades however, shadowy hedge funds and secretive financiers aren't getting the major blame. Instead, it's long-term investors like California's biggest public-employee pension fund and Harvard University's endowment fund that have gradually widened to include assets beside stocks and bonds. http://online.wsj.com/article/BT-CO-20090701-714340.html July 1, 2009

She added that while oil had been a popular investment earlier this year, when crude prices were close to $30, much of this had been from pension funds and other investors who were not speculators - but instead looking to find greater diversification as they "rejigged" their portfolios in light of the economic downturn. http://news.bbc.co.uk/2/hi/business/8132567.stm 3 July 2009

http://bespokeinvest.typepad.com/bespoke/2008/12/harvard-endowment-takes-a-22-hit-in-4-months.html as of Dec 3, 2008

Harvard had derivatives that gave it exposure to $7.2 billion in commodities and foreign stocks. With prices of both crashing, the university was getting margin calls--demands from counterparties (among them, JPMorgan Chase and Goldman Sachs ) for more collateral. Another bunch of derivatives burdened Harvard with a multibillion-dollar bet on interest rates that went against it. http://www.forbes.com/2009/02/20/harvard-endowment-failed-business_harvard.html 02.20.09

These pension & endowment funds treated crude like 1960's glamour (one decision) stocks. They were passive LONG-term investors not end-users like Dupont or Monsanto who were engaged in commercial hedging or traders/speculators who bought crude TO sell it. This passive LONG-term investing removed supply for very long periods of time. It also exacerbated the decline because these passive funds did not sell until crude had dropped a lot from the highs in 2008. No speculator could have afforded to sit on such large paper losses.

As a personal note to illustrate "who bought ... TO sell it" My parents use to be in the wholesale supply biz before i was born. When i became a floortrader & member of a commodities exchange, i invited my mother down to the floor. I came out of the pit & asked her what she thought. She said "David, where are you going to store this stuff? You only have a small apartment." I said, "Mom, we buy it TO sell it...5 seconds later...5 minutes later...5 hours later...5 days later. We never actually see it."

Regards,
dave

[psychodave]

Thanks Dave, the picture is much clearer to me.

Your
"This passive LONG-term investing removed supply for very long periods of time."
and the
"also exacerbated the decline"
particularly helped. I'm a sucker for "Not only ... but also" dynamics.

I find your most important contribution to be the earlier
"The word 'speculators' clouds the issue" remark.

We're going to be offered a lot of red herrings and false scents in the coming years and you've added transparency to a murky system with your comments.

[dave]

@psychodave,

"I'm a sucker for "Not only ... but also" dynamics."

I love juxtapositions too because i don't think a statement shields much light by itself, but juxtaposed with another perhaps can show the depth of both. Great minds think alike; and can learn different things from one another. :)

Regards,
dave

[Anna Coulling]

Moves by the CFTC to try and regulate the oil trading market and prevent the kind of speculation which has seen crude oil prices rise from $30 per barrel back towards $70+ this year took an interesting twist yesterday when it was announced that the weekly COT data would now include new details on the aggregate holdings of the big Wall Street dealers, hedge funds and other financial participants. COT data is a useful market sentiment tool but as many of the market participants both hedge and speculate it has become increasingly difficult to analyse. According to the CFTC the new format will be making its debut next Friday.