From the February 01, 2010 issue of Futures Magazine • Subscribe!

Did you hear the one about...?

A few months ago in a roundup of political cartoons, one made me especially laugh. It went something like this: a teacher speaking to an elementary school class says: “Give me a sentence using the word ‘sacks,’ meaning pillage or plunder.” A student in the class responds, “Goldman Sachs.”

As I write this, the Wall Street titans, including Goldman’s Lloyd Blankfein, have just testified in front of the Congress’ bipartisan panel investigating the financial crisis. Once again, they were taken to task as its cause. At one point when Blankfein equated the crisis to an earthquake or other “acts of God,” a panel member responded “these were acts of men and women.” The other titans, including J.P. Morgan’s Jamie Dimon and Morgan Stanley’s John Mack, were contrite and sometimes admitted failure. Dimon, who typically has been defiant at these hearings, admitted they had no idea home prices would drop by 40%. And yet, it seems the actions they take, or at least what the public sees, are more of the same. Huge bonuses are being passed out to many of the investment bank firms, while some government loans haven’t been paid back. You would think they would learn.

There is no doubt that 2009 was a wild year and the past decade even wilder. Market volatility soared and came down. The stock market collapsed and came back. The dollar continued down and then rallied. Commodities markets mostly soared. Gold, the poster child commodity, went over $1,000 per oz. In all this drama, and almost ironically, one of the most rangebound products was crude oil, holding roughly between $60 and $80 per barrel. One reason might be the cooling economies and slowing demand. Another might be the weakness of the dollar, on which oil is highly negatively correlated. Another could be oil speculators weren’t running the market, at least that’s what some regulators might say.

That range-bound trading of crude oil most likely will continue in 2010, according to Linda Rafield, our guest author who is a senior market analyst for Platts. Rafield writes in “Slow and steady: Energy outlook 2010,” page 22, that the key to energy movement in the next year is no surprise: demand for oil. This demand will hinge on the global economic recovery, which may be tepid at best. It also will hinge on U.S. dollar strength and weakness, as it has in the past.

This leads to an interesting finding: that market analysts point to the rise and fall of oil due to demand, which relates to economic strength. Nowhere in the analysis does it state that energy speculators will decide the fate of what we pay for a barrel of oil.

Despite this, while the bankers were being grilled by the bipartisan panel, the Commodity Futures Trading Commission was working up plans on hard position limits for oil futures traders. Another irony: again, while oil speculators in the United States were skewered, and investment banks were under pressure, thus affecting their in-house commodities trading desks, international oil trading firms Vitol, Glencore, Trafigura, Gunvor and Mercuria, who according to the Financial Times trade about 15% of the world crude and oil products, made roughly $4 billion. All this oil trading while prices remained relatively placid.

This year will be equally as interesting as the past decade. However, expect the mind-numbing regulatory speak to continue, complete with multiple hearings on speculators as well as those bankers who are credited with bringing on the financial crisis. Whether any regulation that actually helps gets passed could be the makings of the next binary contract.

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