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More Attempted Gov't Market Manipulation

Didn’t we learn a thing or two last year when the SEC banned sort selling and the market continued to tank?

From the WSJ:

Oil-market analysts question the idea that speculative investments have pushed up prices. They attribute the current volatility to uncertain prospects for economic recovery, and the long-term rise to an oil industry that has struggled to boost supply in response to the surge in demand from China, India and other developing economies.

“The spread of daily oil-price movements around the monthly average is because no one has a clear expectation of what the future price is going to be,” said David Kirsch, an oil-market analyst at PFC Energy. “Putting limits on financial investment is only going to have a limited effect on overall volatility.”

In Congress, though, there is growing consensus that investors could be distorting prices. A recent report from the Senate Permanent Subcommittee on Investigations blamed speculators for driving up wheat prices in recent years, and recommended the CFTC enforce position limits on index traders in the wheat market.

In a statement, CFTC Chairman Gary Gensler said the agency will hold a public hearing to gather views from consumers, businesses and market participants on proposals to impose limits on trading in energy future contracts. The CFTC’s proposed rules would also require hedge funds and swap dealers to report holdings — including those traded over-the-counter and at overseas exchanges — in a separate and routine way.

Energy traders say they are concerned that the regulations could stunt trade, increase costs in the marketplace and potentially scare away some players. “Speculators play a crucial role in the futures market by providing liquidity to hedgers,” such as oil producers and airlines, said Addison Armstrong, director of exchange-traded markets at TFS Energy Futures, a Stamford, Conn., broker. “Traders don’t want rules that are going to change the game.”

The interventionism represents a significant shift for both the CFTC and the U.K. government, both of which have previously taken a more free-market approach and stopped short of calling for action on speculators. “Where there has been unfair speculation or abuse of the market then we would be prepared to act,” Mr. Brown said in a briefing with journalists.

Mr. Brown and his French counterpart called on the International Organization of Securities Regulators to look at improving transparency and the supervision of oil-futures markets. An umbrella organization for global securities regulators, IOSCO helps to set international standards and advises national bodies on regulation. In March, it set out guidelines on how regulators can beef up their supervision and enforcement of commodities.

The French and British leaders hope to get backing for their drive at the summit of the Group of Eight leading industrial countries that begins in Italy on Wednesday.

Politicians around the world are worried about the effect of rising oil prices on the recovery potential of their recession-hit economies. In recent weeks, companies in various industries have complained that the rise in oil prices has, or will, hurt their profits.

Can anyone define “speculators” for me? Can anyone tell me what the price of oil “should” be based on fundamentals? Can anyone tell me what variables go into that fundamental analysis?

I ask because I have no idea. Why?

The price of oil takes into account (among others):

  • Current supply/demand
  • Expected future supply/demand
  • Geo-political considerations (will Israel attack Iran, will Chavez nationalize every oil co. etc)
  • China’s future needs

Now, in order to be able to say “this is the what the fundamental price should be” means that we can answer those questions with a high degree of accuracy. If we are off, for example on what the future demand will be based on US consumption in November, than the current price of oil is either too low or too high.

Since we know the quality of economic predictions decreases as the time from their date increases, how can we really with any type of intellectual honesty say “demand will be x” in November or early next year?

If I think it is going to be 10% higher than today an I buy the ETF USO to have exposure to oil, does that make me a “oil speculator” or an “investor” because I view the current price as too low based on my expected future fundamentals?

The problems the abound. First we have what seems to be a discernible trend to demonizing a group of people because we do not like the outcome and because it helps the government take action. Second, there is the arrogant opinion that the government can fix all ills and dictate the actions of the market. Third, this will fail because when investors are not able with confidence to understand the rules under which they invest, markets breakdown.

We saw proof of this last year with the short selling ban. Investor confidence fled and while there was no short selling, there were also no buyers due to this lack of confidence. What happened next that as prices fell, the selling of shareholders increased and the lack of buyers caused markets to crater.

What will happen to this current proposed rule? Well, the easy thing would be for the UNG/USO ETF’s to simply split. Place 1/2 of assets in a separate entity, tied to the same commodity and then rule averted because no one entity would control too much of the futures market. Has anything fundamentally changed? Nope

The only thing different would be yet another reason for investors to fear the market and what government may decide to do to it on any given day….that is the worst thing of all .


Disclosure (“none” means no position):Long UNG, none

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4 replies on “More Attempted Gov't Market Manipulation”

good analysis as always. Does the government think speculators won't simply trade oil on foreign exchanges? Silliness in the extreme. Who is John Galt?

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