Last week the US Treasury Secretary Timothy Geithner provided more details on how he plans to give regulators greater powers in policing the world of commodity exchange-listed and OTC derivatives. The biteback from the industry is now gathering pace.
Barcap’s daily energy note on Tuesday infers such moves are ‘misguided’ (our emphasis):
Reservations about the path and timing of a global recovery, but more importantly uncertainties pertaining to the possibilities of misguided intervention through regulatory reforms, kept a lid on WTI prices, with the front-month contract falling by 0.33% to $59.69/bbl. August Brent prices, however, increased by similar amounts to $60.69/bbl, increasing its premium to WTI to $1. In our view, the tightness in the Atlantic crude market notwithstanding, the recent move down in WTI relative to Brent has also been a product of CFTC’s proposed actions, whereby there has been an additional incentive to scale back US futures market exposure.
Stephen Schork of the Schork Report, meanwhile, notes the following from the industry in general (emphasis FT Alphaville’s):
Voicing the loudest concern are businesses that use customized contracts that are not meant to be cleared or traded on an exchange, but are intentionally unique and crucial to their ability to manage risk in their industry. A coalition of energy companies wrote to the joint committees. The letter said, “it is essential that policymakers preserve the ability of companies to access critical OTC energy derivatives products and OTC energy commodities markets. We rely on these products and markets to manage risks to help stabilize and keep energy costs low for consumers.”
Beating all those views in terms of audacity, however, is Goldman Sachs’ take on CFTC-proposed position limits for exchange-traded futures specifically. According to Reuters the bank believes it will and should be exempt from any such restrictions as its positions are for energy-hedging purposes (our emphasis):
NEW YORK, July 14 (Reuters) - Goldman Sachs Group Inc on Tuesday portrayed its energy trading as hedging that should be exempt from proposed U.S. government limits on the volume of contracts that speculators can trade.
Goldman’s Chief Financial Officer David Viniar said the bank’s trades are vital to enable hedging. He said during a conference call that proposed regulations may have little impact on Goldman’s commodities results if the U.S. Commodity Futures Trading Commission retains hedging exemptions currently granted to banks doing energy trading.
“Consumers need hedging. Producers need hedging. And you need financial intermediaries to help do that,” Goldman’s Chief Financial Official David Viniar told a conference call with analysts after unveiling the company’s second quarter results.
This, of course, is a touch absurd.
While Goldman Sachs is a major commercial player in the physical market via its commodities subsidiary J.Aron, that does not mean its activities in the paper market are not akin to those of a speculative entity. It especially doesn’t mean that it only ever uses the futures markets for energy-hedging purposes only.
In fact, there is no reason why Goldman can’t take on proprietary paper-market trades that actually benefit from its uniquely insightful position as a physical market player.
What’s more, if you are to side with former IPE director Chris Cook’s views on the matter, activities within the physical market are potentially those manipulating or influencing outright prices more than anything else, among others via the control of small but very influential physical benchmark markets like the one for Brent, and potentially through close relations with other major producers.
As Cook explains in a comment to FT Alphaville:
My suspicion is that these days their main strategy (there were other ways of making money before) is that the GCSI fund and any other funds who follow are essentially supporting the market price off-exchange through the opaque and aptly named “Brent Complex” of: (a) ICE Europe’s BFOE (Brent, Forties, Ekofisk, Oseberg) cash settled contract; (b) the BFOE forward 600,000 barrel contract (note that BP sold some or all of their North Sea production but retain the pipeline network, and know about virtually every barrel that moves); (c) the “dated” BFOE price (which comes about when the BFOE contract goes into its delivery cycle — (which is the actual global benchmark for most oil these days)
NB. WTI is irrelevant and is dragged in BFOEs wake by a massive arbitrage market; (d) the pretty opaque market in “Contracts for difference” and similar exotica which link the above three. I think it is possible that the BFOE price is massaged and hyped upwards and is held as high as possible by “buying in” cargoes (there are only 70 a month or so) for as long as losses made on these cargoes is less than the profits made on the other contracts based upon these prices.
This is not dissimilar to the way in which a cartel supports a commodity price (cf Tin) until the money runs out. In this case the producers get a free ride – they will hardly complain about the middlemen making a few billion when they are making tens of billions. This “bezzle” – JK Galbraith’s term for an economic loss where the loser isn’t aware he’s losing – is of course being applied to consumers.
Now it’s true they have a good idea they are being screwed, but in fact they are looking in the wrong place for the screwer. Gensler will be quite happy to look at putting limits on exchanges, because that’s not where his (former) colleagues are making their money. As a purely hypothetical question, does anyone really ever leave Goldman, or are they just on long term secondment?
Interestingly, however, Goldman is actually in favour of further regulatory policing of the OTC market itself. As Reuters reports:
Even before the CFTC initiatives rolled out last week, the Obama administration had proposed bringing unregulated over-the-counter trades in commodities to exchanges that clear them centrally and transparently.Viniar said Goldman supports that move because it was “a believer in central clearing.” “We think that is good…for the market, and actually it’s good for us because it levels the playing field in some ways.”
Although this is logical. After all, it is still in Goldman’s interests to have solid counterparties. And as Cook points out, just because a market is cleared doesn’t mean it is transparent.
Related links:
What’s really moving the energy markets – FT Alphaville
Speculator crackdown: Who will say what? – FT Energy Source
OTC under fire, but what about commodities? - FT Alphaville