Oil traders look at greater volatility ahead, maybe

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 pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

Futures and options trading involves substantial risk of loss and may not be suitable for everyone. The information presented by The PRICE Futures Group is from sources believed to be reliable and all information reported is subject to change without notice.


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