David Chow in the Washington Post has dug up some figures on the involvement of Sovereign funds in commodity indexing. He states that the funds involved did not originate from commodity profits (e.g. Middle Eastern sovereign funds reinvesting oil profits). Since the bulk of Sovereign funds originate from commodity profits of one type or another, and predominantly oil profits, it seems likely that there is more of this type of investment then Chow has uncovered. There is little transparency in the unregulated swap market.
Of course if oil producers are buying oil futures through swap dealers it amounts to shilling–running up prices with leveraged purchases of paper oil.
The debate over the cause of record high commodity prices rages through Congress and the media, not to mention high-fuel-price demonstrations and food riots reported in dozens of countries. Unfortunately, this debate has generated more heat than light. Fundamental “supply imbalances,” “Chinese and Indian demand,” and “the plummeting dollar” are the rallying cries of the bulls. Those hurt by high prices point fingers at commodity speculators. Both cases have merit. Who is right? What, if anything, should Congress do?
There are definitive, obvious answers to both questions. First, the blame must be laid at the feet of speculators who have been allowed to run amuck by the Commodity Futures Trading Commission (CFTC), the very agency charged by Congress with preventing excess speculation. Why am I convinced that speculators are to blame? The answer will be obvious to fans of tv’s Dr. House. We can eliminate causes for which there is no ready cure; including supply shortages, Chinese and Indian demand, and the weak dollar. Ignoring the distraction of causes with no quick fix, we can focus on the one factor that has a prescription: excess speculation.
Monday, June 30, 2008
A Simple Old Reg That Needs Dusting Off
By GENE EPSTEIN
Fixing the inflation problem.
IN ITS STATEMENT ACCOMPANYING ITS DECISION last week to leave the short-term interest rate unchanged, the Federal Open Market Committee expressed concern about "the upside risks to inflation," specifically mentioning the "continued increases in the prices of energy and other commodities."
Meanwhile, the Homeland Security and Governmental Affairs Committee held Capitol Hill hearings on "Curbing Excessive Speculation in the Commodity Markets."
The connection between the two events was little noticed but is direct: Something can be done about the higher prices of food and fuel — the source of the inflation that concerns the Federal Open Market Committee. Much as I hate to agree with any politician who blames the speculator whenever goods get too dear, which usually amounts to shooting the messenger, Homeland Security Committee Chair Joe Lieberman unfortunately had a point when he accused speculators of "artificially inflating the prices of food and fuel futures."
On June 26, 2008 the Commodity Futures Trading Commission posted an ominous "CFTC Emergency Authority Background" on its website. I have to tell you that if this is meant to "telegraph" their intentions, it would not likely be positive for commodity markets in general, and petroleum markets in particular. In my humble opinion, this action may be a prelude to invoking emergency powers to restrict commodity buying, and thus lower prices.
Of course, the laws of unintended consequences pertain. Some commodities have daily trading limits. If a bearish shock were to hit these markets, bulls have to potential to be locked in adverse positions as prices fall day after day without any significant trades taking place. I have been there. It ain’t fun.
If the CFTC simply wants to panic the market, this is a good start. Read the advisory at: http://www.cftc.gov/stellent/groups/public/@newsroom/documents/file/cftcemergencyauthoritybackgrou.pdf
The New York Times reported that the CFTC is set to announce new policies on Monday, June 2. There are no details available, except that the Commission is not expected to enact sweeping changes recommended by me and others. Read the Times article here: http://www.nytimes.com/2008/05/31/business/31cftc.html
This announcement does have market-moving potential if it is perceived as restricting the buying activity of commodity index traders. I cover the CFTC’s current and historical policies regarding CITs on pages 9 through 13 of my book, The Commitments of Traders Bible. To recap, the Commission has been most accommodating to these long-only commodity “investors” represented by the largest swap dealers. They have granted wholesale exemptions from speculative trading limits imposed on traditional commodity and hedge funds. Last fall they announced their intention to drop limits altogether for long-only commodity indexers. (This idea has since been put on hold.)
"The U.S. Commodity Futures Trading Commission (CFTC or Commission) today announced a number of initiatives to increase transparency of the energy futures markets. You can read their statement here: http://www.cftc.gov/newsroom
Bunk. The CFTC’s announcement provides not one new piece of public information or data about the petroleum markets. We are simply to take their word that they are increasing surveillance.
If the CFTC truly wishes to provide greater transparency, it would include petroleum markets in the COT-Supplemental weekly report, which breaks out the positions of commodity index players. These are the largest long players in the dozen markets that the CFTC does report, suggesting that they are a dominant player in oil as well.
The curtain has already been pulled on the Commission’s using the "commercial" category to camouflage the big swap dealers holdings. Why don’t they just come clean and report the totals.
These should also include the ICE crude oil contracts. After all, ICE is an American company, which by operating in London allows large traders a certain degree of anonymity not provided here. The CFTC allows ICE trading terminals in the US. They should report the large traders. Just my opinion…
I use the Futures + Options report in lieu of the Futures only Commitments of Traders Report. The Futures + Options report is, obviously more comprehensive, and it is also the basis for the COT-Supplemental breakdown of Index Traders. Although the net position patterns may look almost identical for many markets, the actual position totals vary. This brings up an interesting point. In some markets, in some weeks, the totals for the Non-Commercial category may be larger on the Futures Only than on the Futures + Options report:
On April 22, the CFTC is holding a roundtable regarding problems caused by overspeculation in ag futures markets. Here is the list of invited participants.
For Release: April 15, 2008
Provides Various Ways to Access the Public Forum
Washington, DC – The Commodity Futures Trading Commission today released the participant list for the upcoming roundtable discussion on the agricultural markets. The roundtable is designed to gather information about whether the futures markets are properly performing their risk management and price discovery roles. Due to significant space limitations in the Commission’s hearing room, the CFTC is offering several avenues for interested members of the public to access the roundtable.
By Gene Epstein
CHINA, AS EVERYONE KNOWS, IS A BIG FORCE IN THE extraordinary boom in commodities. Its voracious appetite for everything from corn and wheat to copper and oil has helped push up U.S. commodities prices by some 50% over the past 12 months.
But China is by no means the whole story. Speculators — including small investors — are also playing a huge role. Thanks to the proliferation of mutual funds and exchange-traded funds tied to commodities indexes, speculative buying has gone way beyond anything the domestic commodities markets have ever seen. By one estimate, index funds right now account for 40% of all bullish bets on commodities. The speculative juices are even more plentiful — nearly 60% of bullish positions — if you count the bets placed by traditional commodity “pools.”