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Speculators Feel the Heat as Demand for Tighter Regulation of Oil Contracts Rises

Jason Simpkins — Thu, 09 Jul 2009 17:36:38 +0000

The Commodity Futures Trading Commission (CFTC) may impose stricter limits on commodities speculators who are believed to be behind the main force behind wild swings in the futures markets over the past two years. The investigation has the support of politicians seeking greater price stability for the global economy and consumers, but traders argue that such restrictions will only reduce market liquidity and not necessarily prices.

CFTC Chairman Gary Gensler said his agency will hold a series of hearings from July through August to determine whether or not it should place new limits on energy futures contracts.

Right now, the CFTC sets limits on the amount of futures contracts in some agricultural products that can be held by market participants. But futures exchanges are free to determine what, if any, position limits should exist for energy futures.

The New York Mercantile Exchange (NYMEX) currently restricts oil traders to 10,000 net futures for any one trading month, and 20,000 net futures for all months. However, traders cannot exceed 3,000 contracts in the last three trading days of the spot month.
“This different regulatory approach to position limits for agriculture and other physically delivered commodities deserves thoughtful review,” Gensler said. “It is incumbent upon the CFTC to ensure a fair and transparent price discovery prices for all commodities.”

Speculators – specifically, large investment banks, such as Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE:MS), that build multibillion positions in futures and swaps in the commodities markets – are believed to be a big reason for the sharp fluctuation in oil and gas prices over the past two years.

As of last July, when oil hit a record-high $147 a barrel, financial investors had about $300 billion riding on indexes that track the value of futures contracts, according to the International Energy Agency (IEA). That’s about four times as much as in January 2006.

Similarly, a sharp shift in the futures market this year helped oil prices rally about 115% to $73 a barrel in June from below $34 a barrel in February. Positions held on the New York Mercantile Exchange by investors who expected the price of oil to rise shifted from a net 11,000 short to 40,000 net long from May to June, as traders shifted their positions to reflect an improved outlook for the global economy.

That shift alone helped accounted for at least 20% of oil’s price surge during that period according to the IEA.

“A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. told Bloomberg News. “Something has to be done to reduce some of the speculation, no doubt about it.”

In an opinion piece submitted to The Wall Street Journal yesterday (Wednesday) French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown said that the recent gyrations of the oil market defy the “accepted rules of economics,” and called on regulators to take coordinated global action against market interference by speculators.

“The surge in prices last year gravely damaged the global economy and contributed to the downturn,” the two statesmen said. “The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery. Governments can no longer stand idle. Volatility damages both consumers and producers.”

Brown and Sarkozy called on representatives of the Organization of Petroleum Exporting Countries (OPEC), the IEA, and the Expert Group of the International Energy Forum (IEF) to work develop a shared analysis of future supply and demand trends and a price range that would be more consistent with fundamentals.

“The experts should also consider any measures that could be put in place to reduce volatility,” they said. “Discussions should look again into the question of whether trading activity is amplifying erratic price movements.”

Brown and Sarkozy said they would pursue the issue further at the meeting of the Group Eight nations in Italy this week.

Of course, not everyone is convinced that more regulation is the answer.

Investment banks, such as Goldman Sachs and JP Morgan Chase & Co. (NYSE: JPM) “are the market makers,” Michael Lewis, a partner at the Washington law office Paul, Hastings, Janofsky &Walker LLP toldBloomberg. “Those are the entities that have the huge positions. If the financial players, the banks, the hedge funds, et cetera, are limited to the number of trades they can take, it will lead to less trading. Less trading, I don’t think necessarily leads to lower prices.”

Source: Speculators Feel the Heat as Demand for Tighter Regulation of Oil Contracts Rises

Investment News Briefs Wednesday, July 8, 2009

Money Morning Staff — Wed, 08 Jul 2009 13:00:57 +0000

U.S. Government to Hold Hearings on Futures Trading; Boeing to Acquire 787 Fuselage Maker; Job Losses Contribute to Rising Credit Delinquencies; Ex-Goldman Sachs Worker May Have Stolen Crucial Code; Declining Southwest Traffic Prompts Deep Fare Discounts; GM Asks U.S. to Let It Drop Dealers, Parts Maker Files for Bankruptcy

Regulators will hold hearings this month and next to possibly limit the holdings of energy futures traders, including index and exchange-traded funds. The U.S. Commodity Futures Trading Commission (CFTC) will hold hearings in the next two months to consider the need for government-imposed restrictions on speculative trading in oil, gas and other energy markets, Chairman Gary Gensler said in a statement. “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.” The CFTC did not give dates on when the hearings would be held or who would speak at them.

Boeing Co. (NYSE: BA) will acquire Vought Aircraft Industries, which makes the fuselage for Boeing’s oft-delayed 787 Dreamliner as well as parts for other aircraft including the 747 and 737. Boeing will pay $580 million in cash and release Vought of its obligation to repay $422 million in cash advances for work on the 787, according to a report in The Wall Street Journal. The acquisition gives Boeing access to Vought’s North Charleston, S.C. plant, marking the second time the aircraft maker has taken over a key part of the supply chain for the 787. “We take great pride knowing that we have been able to satisfy the technological and physical demands of the 787 program alongside much larger companies,” said Elmer Doty, Vought president and CEO. Last June, Boeing acquired a separate Vought facility in South Carolina that does fuselage subassembly.

Rising unemployment is taking its toll on credit card delinquencies, which escalated to 6.6% in the first quarter, up from 5.5% in the fourth quarter, according to a American Bankers Association (ABA) report. More than a third of the 6 million jobs lost since the recession began in December 2007 occurred in the first quarter of this year, the ABA said. Late payments on home equity loans increased from 3% to 3.5%. “The number one driver of delinquencies is job loss,” said ABA chief economist James Chessen. “When people lose their jobs, they can’t pay their bills. Delinquencies won’t improve until companies start hiring again and we see a significant economic turnaround.”

Goldman Sachs Groups Inc. (NYSE: GS) is facing the loss of a proprietary trading code and millions of dollars from increased competition if software stolen by a former employee falls into the wrong hands, a prosecutor said in a Bloomberg News report. An ex-computer programmer for the bank, Sergey Aleynikov, was arrested last Friday after arriving at Liberty International Airport in Newark, N.J., U.S. officials said. Aleynikov transferred the multi-million dollar code to a server in Germany, where others may have had access to it, said Assistant U.S. Attorney Joseph Facciponti. “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public. “The copy in Germany is still out there, and we at this time do not know who else has access to it.” Aleynikov’s attorney, Sabrina Shroff, said in court the government’s allegations are “preposterous,” adding that Goldman Sachs was aware that Aleynikov was downloading programs to his personal computer to work from home and did not disseminate the code. “Someone stealing that code is basically stealing the way that Goldman Sachs makes money in the equity marketplace,” Larry Tabb, founder of market research firm TABB Group told Bloomberg.

Global information technology (IT) spending will fall 6% this year, according to a report from market research firm Gartner Inc.(NYSE: IT). The drop is significantly worse than Gartner’s earlier forecast for a decline of 3.8%. “While the global economic downturn shows signs of easing, this year IT budgets are still being cut and consumers will need a lot more persuading before they can feel confident enough to loosen their purse strings,” said Richard Gordon, research vice president and head of global forecasting at Gartner. The firm expects IT spending to rebound in 2010, growing 2.3%.

Hot on the heels of the revelation that its June year-on-yeartraffic fell 2.1%, low-cost air carrier Southwest Airlines Co.(NYSE: LUV) offered an steep discount on fares for flights between September 9 and November 18. For two days through today (Wednesday), the airline will charge $30 for flights 400 miles or less, including one of its newest legs between New York’s LaGuardia Airport and Baltimore. For flights between 401 and 750 miles, Southwest is charging $60 and $90 for longer trips. As with many airline specials, there are restrictions such as limited seating and the deal will not apply to Friday or Sunday flights. Southwest shares closed down 1.82% yesterday (Tuesday), settling in at $6.48.

General Motors Corp. (OTC: GMGMQ) asked a federal bankruptcy court yesterday (Tuesday) for permission to drop 38 U.S. dealers who rejected GM’s buyout offer, Reuters reported. The breakup between the automaker and its dealers would take effect this week if the court approves GM’s request. Roughly 4,100 dealerships have signed agreements to continue with the new government-backed GM, which is expected to emerge from bankruptcy this week. In related auto news, parts and car seat maker Lear Corp. (NYSE: LEAR), which saw 25% of its revenue come from GM, has filed for Chapter 11 bankruptcy protection,The New York Times reports. The filing is the latest among auto part makers, with the last ones coming in May from Visteon Corp.(OTC: VSTN) and Metaldyne Corp. Lear last week obtained an additional $500 million in bankruptcy financing from JPMorgan Chase & Co. (NYSE: JPM) and Citigroup (NYSE: C), The Timesreported.

Source: Investment News Briefs Wednesday, July 8, 2009

Gas Prices Roar to a New Record for the 22nd Straight Day

Jennifer Yousfi — Fri, 30 May 2008 13:41:51 +0000

Back when it was Esso, the Exxon Mobil Corp. (XOM) predecessor urged motorists to “put a tiger in your tank.” These days, consumers probably feel more like they’ve got a tiger by the tail. And they should, for their family budget is certainly getting mauled.

Retail gas hit its 22nd consecutive daily high yesterday (Thursday), according to AAA’s Daily Fuel Gauge Report.

The average nationwide cost for a gallon of regular unleaded was $3.952, while the average cost for a gallon of diesel was $4.787.

According to the AAA survey, gas prices have increased nearly 10% from a month ago and are up almost 24% from one year ago, CNNMoney.com reported.

Connecticut has the highest average by state at $4.223 for a gallon of regular, while Missouri has the lowest at $3.761.

The average cost of gas has crossed the $4 threshold in 11 states and Washington, D.C.

The cost of gas has climbed steadily higher, following in the wake of soaring oil prices. Oil reached a record high of just above $135 per barrel on May 22, but since then the price has dropped.

Crude oil for July delivery fell $4.31, or 3.3%, to $126.72 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange, according to Bloomberg data, as the high cost of gas is finally acting to curb consumer demand.

“There’s a lot of demand destruction taking place,” Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York, told Bloomberg News. “We are probably headed for $120 in the near term.”

But the slight reprieve we’re currently experiencing is likely to reverse itself just as quickly as we head into the summer driving season and speculators continue to push up the price of “black gold.”

Both Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) recently released reports that have oil soaring over $200 a barrel within the next two years.
Money Morning Investment Director Keith Fitz-Gerald – one of the first investment gurus to predict triple-digit oil prices – has boosted his own target, suggesting that oil could go as high as $225 a barrel.

“The math is really simple here,” Fitz-Gerald said in a recent e-mail interview from China. “We are burning through supplies at a rate that’s four times to five times faster than we’re discovering new reserves. Throw in a few [surprises]… perhaps a terrorist event… and add in the accelerating use of oil and gasoline in Third World countries, and we have the recipe for far higher prices.”

Source: Gas Prices Roar to a New Record for the 22nd Straight Day