So, this weekend, the Bank for International Settlements released a preview of an upcoming report in which they make a connection between financialisation and the oil market.
Tracy’s written it up here.
But, before you get too excited, two things must be pointed out.
The first, of course, is that a BIS admission about financialisation effects on the oil market is pretty unexpected.
You see, as far as we’ve tracked or heard from BIS economists on this matter, they’ve resisted arguments and models pointing to financialisation effects, embracing instead explanations that link price effects to fundamentals.
Which brings us to the second thing. Yes, the BIS is shifting its view on the financialisation argument, but the paper also shows it doing so in a really convoluted and unconvincing way. Definitely the opposite of Occam’s Razor. Read more
Back in May 2008, nobody — especially regulators — had a clue about what was causing crude oil prices to spike to $100-per-barrel-levels, and mostly everyone was inclined to either blame “China” or “speculators” or some combination of the two.
But Michael Masters, a portfolio manager at Masters Capital Management, had a simple proposition. In the Senate committee hearings organised to figure out exactly what was going on, Masters testified that it was his belief that a new class of investor — one he dubbed the passive “index speculator” — had bulldozed his way into the market and distorted the usual price discovery process. Read more
Craig Pirrong’s white paper on the economics of commodity trading firms (CFTs), sponsored by Trafigura, has been released and can be found here.
Overall conclusion: commodity trading firms are not systemically risky because they do not engage in the sort of maturity transformation that banks do. They also tend mostly to operate on a hedged basis, via “basis trade” exposure. Short-term assets meanwhile are funded with short-term debt while long-term assets are funded with long-term debt, meaning the institutions are not heavily leveraged at all, though balance sheets are exposed to liquidity or rollover risk. Read more
The Wall Street Journal has been digging deeper into the metals warehouse logjam issue, and discovered that both Alcoa and Rusal may be beneficiaries of the situation due to the physical premiums they collect when end-users are forced to go direct to producers for metal so as to avoid queues.
According to the WSJ the aluminium makers have reaped as much as $1.4bn in revenues from higher fees due to the logjam.
The story then suggests this strips the credibility from their objections to proposed LME rules to ease the bottleneck. Read more
The Federal Trade Commission weighed into the intensifying debate in Washington about oil-market speculation, saying supply-and-demand forces drive gasoline prices, not speculative oil traders, the WSJ reports. The FTC didn’t investigate speculation independently, but reviewed the available research and found it inconclusive. The agency also looked at competition in the oil industry and whether it affected gasoline prices from 2005 to early 2011 in the report published on Thursday. The commission also said that gas prices rise faster than they fall, a phenomenon known as “asymmetric pricing” or “rockets and feathers,” an ABC consumer report adds.
The US doesn’t like high oil prices. Neither does it like the speculators it thinks exacerbates them.
So why not take aim at both? Read more
The wonders of Google auto-suggest, silver vox pop edition:
Sweeping plans to curb speculation in raw materials including oil, gold and wheat have been proposed by US regulators, the FT says. The plans come amid fears that surging prices for fuel and agricultural commodities could lead to a food crisis and threaten recovery. But they face an uphill battle to survive after strong opposition even within the regulatory panel that has drawn them up. Platts reports the Commodity Futures Trading Commission voted 4-1 to propose position limits in 28 commodities.
David Rosenberg’s gone all cartoony.
The Gluskin Sheff analyst seems to have given up on on words and is instead using charts — and Loony Tunes — to illustrate his (very salient) points. Read more
In case you missed it, the Independent’s Johann Hari has done a Matt Taibbi — yes he of Vampire Squid fame.
But this time the author doesn’t just accuse the bank of gross financial manipulation, he accuses the institution of single-handedly starving millions around the world 2006 onwards. Read more
Academics have been busy figuring out ways to plug the gaps in pre-crisis financial data, FT Alphaville says — and in doing so they’ve managed to quantify the notoriously opaque yen carry trade. It’s not pretty, but it’s a worthy attempt. Read more
CME Group is opposing a plan by the US commodity regulator to limit speculative energy trading by hedge funds, investment firms, banks and oil companies, reports the FT. The Commodity Futures Trading Commission in January proposed to limit traders’ holdings in US crude oil, natural gas, heating oil and gasoline futures and options.
France has called on the European Union to set up its own US-style Commodity Futures Trading Commission to regulate commodity derivatives and curb market volatility, reports the FT. Christine Lagarde, finance minister, said on Tuesday that the idea would be “highly welcome”. The move is a sign that concern over volatility in commodities and commodity derivatives – often referred to as “excessive speculation” in the US – appears to have reached some European politicians.
Something of an intellectual challenge looms ahead for the Greek government, as it transpires that the Greek State-controlled Hellenic Post Bank spent nearly €1bn last year to secure positions against the possible bankruptcy of the Greek state, writes FT Alphaville. Read more
The ever watchful Sean Corrigan at Diapason Commodities drew our attention on Monday to the state of outright net speculative length in crude products on the Nymex.
Here’s the chart: Read more
On Wednesday, Bank of New York Mellon’s FX analyst Simon Derrick proffered some wise words on the matter of currency speculation and the recent sell-off in both the euro and pound.
Just like FT Alphaville, Derrick has cautioned that a little perspective is needed when reviewing the CFTC’s weekly International Monetary Market (IMM) open-interest figures. Read more
From Reuters on Monday: Read more
…the backlash against those nasty conspiratorial financial speculators who have caused all this sovereign debt crisis stuff, that is.
The following quotes come from a Newsnight interview with Christine Lagarde, France’s finance minister. Read more
The EU’s response to the Greek crisis has fallen rather flat.
Markets are lacklustre on Friday morning — a day after European leaders pledged “determined and co-ordinated action if needed to safeguard stability” of the eurozone. Read more
Thursday’s CFTC proposals on position limits in the energy markets were largely seen as a ‘light touch’ by industry voices. This is because, quantifiably speaking, they set loose limits that hardly went beyond those already enforced by exchanges in the form of accountability limits.
The CFTC also confirmed the new rules would only affect about 10 larger traders, who could probably seek exemptions anyway. That said, in historical terms, the limits would have prevented the likes of Amaranth, the USO and UNG amassing the sort of positions that skewed the markets in previous years. Read more
Barclays Capital does a nice job of assessing the latest back-dated release from the CFTC on commodity index trader positions in the CBOT corn market.
The CFTC statistics, released on October 20, present disaggregated positions of swap dealers and managed money going back to 2006. They were released in an attempt to provide further transparency to 2007 figures, which originally hoped to address the issue of speculator influence on commodity prices As Barcap explain: Read more
Last Friday the CFTC re-categorised the way it presents trader positions in its weekly report to reflect more specifically the type of contracts being held by “managed money” and “swap dealers” — ie, funds and index-funds or financials hedging swap positions.
Anyone hoping the figures would, once and and for all, prove speculative positions controlled far too much length in the energy market might, however, be disappointed. Read more
As has been well-publicised, the Commodities Futures Trading Commission (CFTC) is considering increasing position limits in energy commodities trading, on the perception that large speculative inflows may have contributed to last summer’s epic oil price-moves.
Whether speculators were indeed to blame, however, is still being hotly debated — as, for that matter, is the question of how effective position limits on non-commericial entities might actually be in curbing volatility. Read more
Wow, the commods analysts at Dresdner/Commerzbank have taken a rather bold — if slightly self-congratulatory — stand on oil speculators.
In a note published on Thursday, analysts Eugen Weinberg, Barbara Lambrecht and Carsten Fritsch, are very clear: oil speculators have driven up oil prices, and pending an imminent clampdown by the CFTC, those oil prices will now be going down — closer to their fundamentals. Read more
The CFTC hearings into the evil commodity speculators have got under way in Washington. Those testifying on Tuesday include:
Panel One: Jeff Sprecher, Intercontinental Exchange and Terry Duffy, Chicago Mercantile Exchange Panel Two: Todd Petzel, Futures Industry Association; Ben Hirst, Delta Airlines; Laura Campbell, American Public Gas Association; and Sean Cota, Petroleum Marketers Association of America.