A Sad Day for Freedom and the Free Markets
The CFTC took a dangerous step toward damaging the credibility of our nation's energy markets and may have harmed the economy and the average American. The commission's view that speculators are guilty until proven innocent is just another step in the Dodd-Frank regulatory overreach that is freezing our economy and stagnating job growth. This witch hunt against this elusive ghost called "excessive speculation" culminated in a 3 to 2 party line vote that will help drive trading in oil into a less transparent marketplace and will eventually lead to a less liquid and more volatile market.
You think trading is volatile now, well folks you haven't seen anything yet. In fact forget about volatility. I predict that the implementation of these new regulations will create shortages the next time the market is challenged by the type of economic crisis that we saw in 2008.
The spike up in oil to the all time high in 2008 was the catalyst for this damaging regulation and it was based on the false assumption that "excessive speculation" was driving the price of oil to record highs. Of course we now all know that the prices of oil and all other commodities were a relief valve as the market sought safe haven from the greatest economic crisis of modern times. If money was restricted from entering the futures markets at that time, the global economic crisis would have had much more severe consequences. We would have seen hording of supply and the freezing of commodity movement as the big players would have refused to sell to each other because of the lack of real true price discovery. In other words, the global commodity markets would have frozen more than the banks.
Even Commissioner Michael Dunn, who cast the deciding vote on this dangerous ruling, said, "position limits are a ‘sideshow’ and there’s no proof that there is excessive speculation, or that prices will drop once limits are in place." He is right they won't. This is to appease politicians that have no real understanding of the futures markets and the important role that they play in the heath, vitality and viability of the US economy yet the regulators decided to put in play rules that will have far reaching and damaging unintended consequences.
At a time when the global economy has more risk than perhaps it has ever had you need more and more people to assume that risk or in the end it will be the taxpayers that will have to bail the economy out. It will come in the form of higher taxes and by higher and more volatile prices for all goods. This move to rein in speculation and treat cash settled and deliverable markets differently will add more volatility, not less.
In fact the near record high volatility that we have seen in oil over the last year has been caused by global governments not by oil speculators. Just think how the markets are getting driven around by the headlines coming out of our Fed or central banks around the globe. Some of the biggest one day moves in oil came after speeches by Jean Claude Trichet and was not driven by speculators. With bank failures, quantitative easing and the risks of sovereign default around every corner and the downgrading of America's credit rating, is it any wonder why oil prices have been so volatile?
Just yesterday oil rallied on a Guardian report that France and Germany were going to increase the European bank bailout fund five-fold, adding two trillion Euros. Later it was denied as a done deal but if you look back over the last couple of years in oil it is obvious that the markets are being driven by things other than the so called traditional fundamentals. I didn't even mention the downgrade of Spain's credit rating. Spain's credit rating was cut for the third time in 13 months by Moody’s, cutting it by two levels to A1 from Aa2, with the outlook remaining negative.
Complain all you want about prices but forces from the outside, not speculators, have impacted prices and position limits will make things much worse. Senator Carl Levin said, “The position limits rule approved today by the CFTC represents significant progress for middle-class families facing roller-coaster gasoline, electricity, and food prices.” “Businesses that actually use commodities -- farmers, manufacturers, airlines -- will not be affected and will continue to operate free of position limits.” Yet the truth is just the opposite. Less liquidity and less transparency means that farmers, manufacturers and airlines, who have complained because of their narrow view of how the markets work and what they believe a fair price for oil will be, will be faced with more uncertainty not less and at some point they will be praying for the speculators to come back to create order in an increasingly disorderly world. I can tell you in some markets they would love to have more speculators even "excessive speculators" to take on the risk that producers and users take on every day. These are markets that are begging for liquidity.
CFTC Chairman Gary Gensler said, "Our duty is to protect both market participants and the American public from fraud, manipulation and other abuses.” Of course how do these rules by restricting access to a market serve that purpose? The truth is the difference in the way the market handles those that are cash settled versus deliverable supply may create more fraud manipulation and other abuses. We'll see trading go overseas or into platforms beyond the reach of any regulatory scrutiny somewhere in cyberspace.
This is the wrong treatment for the wrong disease. Oil speculators had nothing to do with the global debt crisis and in fact the oil market probably performed better than almost any market out there. It was the market that took on the risk that the banks refused to take. By providing that outlet it may have saved perhaps tens of thousands of jobs because it was one market that was functioning while other markets stopped functioning. Oil speculation wasn't the problem, it was the solution.
As I have said before critics of oil speculators are confused. Some say that the “long only funds” or ETF’s have distorted the price of oil and others say that high frequency traders that trade in and out many times both long and short have driven up prices. Nothing could be further from the truth. Never before has the oil market been more liquid or transparent. Execution of trades is better than it have ever has been. Business, funds and speculators can now more effectively manage their risk better than at any time before in the history of the markets
Some argue about record open interest and volume that far exceeds what we have seen in the past and that this proves that speculators are driving prices. That is not true. What it proves is that the Fed and its policies are driving investment to commodities. What it proves is that the global oil market is larger than it has ever been reflecting the billions of people in China and India and other parts in the globe that are active participants. It reflects the trillions of dollars of investment that is going to have to be made to meet growing global demand. Even Energy Secretary Steven Chu acknowledged that despite this ruling. He said, "The price of oil is likely to keep rising in the coming decades due to growing demand." "Demand for oil, a finite resource, is expected to rise from 84 million barrels a day in 2009 to 107 million barrels a day in 2035, driven by the laws of supply and demand, the price of oil is likely to rise in the coming decades." Wait, is he speculating? Excessively perhaps?
Speculators are assuming an ever greater amount of risk as the global economy has gone through one of the greatest shocks in history. Without their participation in the market, the global economy would have come to a halt. Now I know the regulators think they are helping, but I am sad to say they are not. When even those voting for the rule voice concern that it is not the right thing to do then it is better that we take a step back and put aside our emotions and really look out for the American people!
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at firstname.lastname@example.org.