Tuesday, September 9, 2008
Speculative Investing and the Oil Markets
The Commodity Futures Trading Commission will soon make final a report on the impact that financial speculation can have on commodity markets. The focus of the article I looked at (linked here from the Wall Street Journal) is the potential of the report to shed light on the substantial fluctuations we’ve seen within oil markets in the past several months. Three senators who will be releasing the report advocate for the implementation of stronger controls for speculative investing, especially for institutional investors selling futures contracts.
Government controls have been threatening oil markets in past months since laws were passed in the senate to limit investments in the industry that were said to drive the price of oil higher. Market analysts, on the other hand, condemned such laws sighting special interests of politicians as the source for the debate rather than the concern for higher oil prices. The laws in themselves brought on shifts in the market that they were enacted to avoid as investors pulled out.
If the results of the report confirm that futures markets are a leading cause for the vast fluctuation of oil prices, I think that to some extent changes should be made to curb their impact. Because the price of oil influences nearly every industry to such an extent, it seems that by limiting fluctuations we could bring some stability into the economy. When traders representing institutions with impressive investment power invest in energy indexes, they have the potential to alter the market.
My speculation is that the Commodity Futures Trading Commission will not release a report in which they do not minimize the supposed impact that futures contracts has on the price of oil. This is because of a July 2008 report from the Interagency Task Force on Commodity Markets stating that the fluctuations are due to “fundamental supply and demand factors” rather than speculative investment practices (report also cited above). Because they don’t want to contradict this finding, they will limit the supposed impact that investor speculation has on the price of oil.
Politics has a central role in the debate. The spin that the three senators put on the results of the Commodity Futures Trading Commission report has the potential to mix opinions. The article brings up the often-questioned intentions of Mr. Masters, a forerunner in the “antispeculation movement,” and whether his position on the issue is dictated by his own portfolio or a sincere interest in rising oil prices.
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2 comments:
Hey Stetson, I agree with you that market speculation should be controlled at least for some extent. Oil price speculation by the investors directly affects of the price of gasoline. I watched a documentary about the American Airlines. They talk about how they bid on future oil prices to get fuel at a low cost. I heard that Southwest Airlines is getting their fuel at a lower price than the current market price because of a smart bid to future oil prices. It is sort of a gamble played by big companies to get oil at cheaper price. If they get it right, it will be very profitable for companies such as airlines.
I agree with Stetson’s opinion fully. It is obvious that the CFTC will not release a report about the price of oil any time soon. With this being such a sensitive issue amongst voters and candidates, everyone has their own opinion on why prices are sky rocketing. Blaming it on a supply and demand issue is not the answer to the problem. We need to find better, reliable resources that practice fair-trading and not bleeding countries to death with high barrel prices. With so many factors at hand, instead of coming out with report after report about why this is such an problem, how about a report on the advancement of a renewable energy source…Hydrogen car perhaps?
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