As oil prices soared to a record high in 2008, traders, politicians and regulators were stunned as oil made a move of historical portions. Some said we hit peak oil! Others said it was an oil company conspiracy! And others said it was a sign of pure market manipulation by speculators!

We heard from Michael Masters of Masters Capital Management who testified before a Senate committee saying that, “What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant..In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels; an increase of 920 million barrels.  Over the same five-year period, Index Speculators demand for petroleum futures had increased by 848 million barrels. The increase in demand from Index Speculators is almost equal to the increase in demand from China!" Masters claimed that price of oil would quickly drop closer to its marginal cost of around $65 to $75 a barrel, about half the current $135 if Congress passed a law to limit speculation.

We heard from others like Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFC Energy Consultants who said that as long as Congress would waive their magic wand and enact legislation to limit evil speculation that gasoline prices would be cut in half to about $200 a gallon.

Of course it is clear in retrospect that those gentlemen were totally wrong. Not one of them happened to mention that those evil speculators disguised as Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors were not driving the price of oil but were being driven to the oil market and other commodities that made similar moves without as much as a mention from these “anti-speculative heroes” because of what was happening as the global economy stated to come apart.

Speculators were not driving the price of oil but were being driven to the commodity markets as they feared that the US banking system was failing. There was a flight out of dollar based assets as the US sub-prime crisis was putting the value of their bond and dollar holdings at risk. The US was dramtically lowering rates and Europe was raising rates and the price of commodities had no choice but to rise.

Why did these “anti-speculative heroes” mention this or the value of the dollar? Did they miss what turned out to be the greatest economic crisis in modern times? Can’t they see that Fed actions and ECB actions made commodities more valuable by tanking the value of the dollar? Could they not sense the fear in the marketplace? Could they not see that other commodities were soaring as well! 

And when it became clear that oil was being driven by a false sense that the US would fail, but China and Europe had decoupled “ from our problems” and tanked $30 and gas to $2.00 without an act of Congress, you might think that the debate about speculators would be over.

Then came Dodd-Frank the committee to fix the markets and deflect any government responsibility for the crisis and they tried to enact portion limits to try and stop speculators from doing something they were not doing in the first place. You can’t just say that speculators drive up oil prices without having any evidence to back it up. You can’t say that speculators were the cause because you "felt" that is the case. To say that speculators were the reason that oil prices went up to record highs is preposterous.

In fact it is clear that limits on speculation would have caused more panic and possible hoarding of supply as are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors would have enough cash to buy physical barrels if they had no way to offset historic risk to their existence. Banks failing, country’s failing. Do you really think position limits would have limited prices! Hoarding and fear would have created even higher prices and shortages of supply.

Yet perhaps cooler heads have prevailed. Reuters News reports that, “Federal limits on commodity market speculation, the prospect of which has haunted Wall Street's big banks, pension funds and energy merchants for five years, may have died in the District of Columbia courts on Friday.  Just two weeks before the "position limits" rule was to take effect, U.S. District Judge Robert Wilkins rejected it and sent it back for an overhaul, a move that even some opponents said was surprisingly tough. Wilkins said the Commodity Futures Trading Commission had failed to prove that it was necessary to impose new caps on speculative bets in 28 U.S. markets, including copper, corn and crude oil, to reduce price spikes and volatility." 

The Judge is right! In fact there is evidence to the contrary and based on what we know about this crisis and quantitative easing, it is more likely that position limits would have increased volatility without using the markets as an escape valve.

Reuters says that, “CFTC Chairman Gary Gensler has several options for reviving the measure - one of the agency's hallmark reforms - including an appeal, a fresh round of rule-writing, or even asking Congress to amend it. But each avenue is time-consuming and comes with potentially insurmountable obstacles. Some academics say the judge's ruling may have effectively killed the political will to pursue one of the most contentious pieces of the Dodd-Frank financial reforms. "Even if Democrats win the White House, the rulemaking process will take years to complete and, my guess, the Democrat commissioners at the CFTC will probably have lost their appetite for this battle," says Jerry W. Markham, a law professor at the Florida International University at Miami and former chief counsel for the CFTC's enforcement division."

The New York Times reported that Iran’s president admitted Tuesday that the American-led economic sanctions on the country were partly to blame for a breathtaking 40 percent fall in value of the Iranian currency, the rial, over the past week.

Wow! Maybe he isn’t so dumb after all! Then the Times said, “He pleaded with Iranians not to exchange their money for dollars and other foreign currencies.”

Yes but did he say pretty please? He also is trying to blame those evil speculators! Just forget about that 29% inflation rate! That has nothing to do with that plunging currency. Of course not!

Spain plays hard ball by hinting they may not ask for a bailout! While the market is spooked a bit, do not believe it for a minute! A good bluff will secure them a better deal!

Bloomberg News reports that natural gas fell for the first time in seven days after rising to a 10-month high on speculation that cold weather next week will boost demand for heating fuels. Gas for November delivery slid as much as 3.5 cents, or 1 percent, to 3.496 per million British thermal units in electronic trading on the New York Mercantile Exchange. It was at $3.502 per million Btu at 11:41 a.m. Tokyo time. Futures rose 5.1 cents, or 1.5 percent, yesterday to $3.531 per million Btu, the highest settlement price since Dec. 2. The contract hasn’t closed lower since Sept. 24. Prices dropped after the 14-day relative strength index rose as high as 74.5 yesterday. A reading above 70 is a sign that contracts are overbought. The RSI was 72.7 today. Commodity Weather Group LLC predicted below-normal temperatures in the Northeast and Midwest over the next six to 15 days. Heating demand in the lower 48 states may be 60 percent above normal Oct. 8 through Oct. 12, data show from Weather Derivatives in Belton, Missouri.

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Phil Flynn

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