The US oil market is now coming under a threat that may be the most egregious form of market manipulation ever. Yet if you think that near record participation in the market by oil speculators are the risk, then think again.
The US oil markets are coming under threat by a faltering Obama administration who is desperately trying to assign blame to the recent increase in oil prices. Their response is to demonize all speculators and to grant the Commodity Futures Trading Commission new powers and change their job from a market regulator to a market manipulator. The Obama administration wants to grant the CFTC new powers to control trading margin requirements and take away that power from the exchanges. The exchanges of course are much better suited to that task and the new power of the CFTC means that an agency that has become more political in recent years will give in to the political whims of the moment and damage the most liquid and transparent oil market in the history of the world. In a free marketplace margins are supposed to be based on volatility not as a tool to try to manipulate prices and to try to punish those who don’t agree with your market or political bias.
This threat by the Obama administration to try to control oil prices by raising margin requirement based on prices, as opposed to volatility, will severely damage the credibility of our markets. Investors will then seek more credible markets elsewhere which will reduce price transparency and ultimately lead to more dangerous market conditions. Speculators that have proved the most liquid in the history of the oil market, will leave our markets in droves seeking a fair and honest marketplace, not one that runs the risk of being influenced by the government. Hedgers will also leave our market because the price of our market will be out of sync with the actual price and that could lead to supply shortages down the road. If indeed the CFTC or the Obama administration has some better insight on what the real price for oil should be, I wish they would share it with the world so we could save a lot of time and effort. Please share with us your method of determining that price.
The President may know what the fair price of oil should be but he doesn’t’ seem to know the difference between a market "manipulator" and a market "speculator." The truth is that without speculators the global market price for oil would be much more volatile and dangerous. We would see oil trade in dark markets and supply streams would be more at risk to be compromised. Without speculators it would be much easier for the market to be manipulated.
If the President wants to investigate market manipulation, perhaps he should start with the Federal Reserve and global central banks. They have done more to manipulate the price of oil than any speculator could ever dream of doing. Fed policy and quantitative easing have been a major factor in the meteoric oil rise. That, along with the confidence placed on the fairness of the oil market, has attracted record amounts of liquidity into this market place. The reason why so much money has flowed to the oil market is because around the world, currencies are being devalued and investors have more confidence in the fairness of the oil market than they do in the policies of many nations. They have more confidence in the oil markets than they do the debt of many nations. They also believe, as Mitt Romney said, that the policies of the Obama administration will lead to higher prices for oil in the future.
The critics of speculation argue that oil is being manipulated because we are trading substantially more oil contracts than there is oil demand in a day. The look at the flawed thought process and often quoted fact that, “the entire world produces only around 85 million actual “wet” barrels a day, this means that more than 90 percent of trading involves speculators’ exchanging “paper” barrels with one another.” In other words, hedgers have the most liquid efficient market in history. They have the most transparent market in history. They have more people that can offset their risk than ever before in history. And that's precisely because there are more market participants and that's because the speculators are in the market as well.
It is because we have more confidence in the oil market than we do in many other markets. For every buyer there is a seller and ever seller there is a buyer. Speculators go long and short and they assume the risk. Open interest is rising because money is seeking a return and commodities have outperformed bonds and the stock market. It is because oil is more valuable than paper money.
The President is right that wars and the threats of war are a major reason for increased oil speculation. Japan, China and Europe have been hoarding oil and therefore speculating that they might not be able to find supply if a war breaks out and the Straights of Hormuz is blocked. Better get the oil while the getting's good. That hoarding has been reflected in the most liquid, transparent market in history, which has alerted the world to this behavior and helped us avoid a price and supply shock later down the road.
The truth is that it is dangerous proposal to allow the government into the price manipulation business. The government should not be in the business of oil price manipulation.