The bull market in oil comes down to just two simple numbers: The world can’t produce more than 85 million barrels of oil per day. The world wants 87 million barrels of oil per day.

The world’s second-largest producer, Russia, is now experiencing a production decline. The Saudis can’t pump any more oil.

So forget hedge-fund speculation and the value of the dollar, that’s what it really comes down to.

And it’s why one German political party’s answer to the high oil price is, frankly, utterly absurd…

Why oil futures are vital to the world economy

Uwe Beckmeyer, transport chief for the country’s Social Democrat Party, has told the German press that his party would call for joint measures by the G8 powers to prohibit leveraged trading on energy contracts. “It’s an extreme step but it has to be done,” he said.

No it doesn’t, my friend.

So, let’s get this clear: One of the major German political parties wants to ban the futures markets in oil and related products as a way to curb prices. It is an utterly stupid and inept way of dealing with inflation and it will end up causing crises in many industries across the globe.

Imagine if airlines weren’t able to hedge their exposure to rising energy costs… any up-tick in energy prices would create a wave of bankruptcies across the sector.

Then there are the farmers. If they do not know how much they will receive for their crops, it makes it impossible to plan properly. After all, isn’t this why futures were derived in the first place?

Futures are not a high-risk investment strategy for manipulative mega-rich bankers. They are a way of REDUCING risk for people operating in the business. Ban futures trading and market risk actually increases.

It is a vital market that keeps the cogs of the global economy turning in a well-oiled and efficient manner. It also improves price transparency going forward, allowing businesses and farmers to effectively plan their finances.

It is clear that these proposals come from people who do not understand the futures market or what it is for.

Of course it’s not just the Germans acting dumb, the Indians and Americans have got in on the act as well.

India bans potato futures

The Indian government has already suspended futures trading in potatoes, chickpeas, rubber and soybean oil in an attempt to combat food inflation.

The move was derided by anyone with any sense. Not only did the ban cover four foodstuffs that made up just 1% of the country’s inflation index, but the price of potatoes has actually FALLEN 27% this year. The move defies logic on so many levels.

Even in that bastion of the free markets, the USA, politicians want to interfere.

Democratic Representative John B Larson has asked Congress to pass legislation which would prevent speculation within the sector from those who do not intend to acquire the commodities on which they bid. He argues that it is speculation that is driving the oil price, while completely ignoring supply issues.

The amount of speculation in the oil price is an unknown, but one thing is very clear…

Oil supply is extremely tight

Over the weekend, Lloyd’s Marine Intelligence reported that Opec oil shipments had fallen by 1m barrels a day in the four-week period to 4 May. Another oil pipeline in Nigeria was also blown up and a Norwegian oil rig operating in the North Sea was shut down after a leak was discovered.

What the Germans, the Americans and the Indians have to remember is that you cannot tell farmers or businesses what to sell and whom to sell to. That is a Stalinist way of running an economy that puts businesses in a straightjacket.

The derivatives markets also play a proper and important role in signalling the need to expand investment in production capacity. Vitally, it provides liquidity to hedgers.

Banning futures trading is a knee-jerk reactionary move by dumb politicians wanting to grab a headline. It is not the way to make markets work efficiently and the G8 should dismiss any proposals tabled.

I would be astonished if the US proposals were passed into law – it is just so “un-American”. Banning futures trading is an utterly preposterous idea. The only way that any limits on futures trading should be considered is when speculation becomes manipulation. This is certainly not the case at the moment.

Regards,

Garry White
Editor
Smart Commodities UK

Source: Why a Ban on Oil Futures And Speculation Will Devastate the Markets