The Commodity Futures Trading Commission completed hearings last week to discuss energy position limits and hedge exemptions and yesterday the International Energy Agency warned about the dangers to the market if U.S. and UK regulators don’t harmonize regulations according to a Financial Times story.
Discuss may not be the proper term for the hearings as it appeared a foregone conclusion that hard positions limits will be applied to U.S. energy futures markets. CME Group CEO Craig Donohue stated in his testimony that the CME Group was prepared to accept such limits though he also warned of their danger.
CFTC Chairman Gary Gensler said he was happy to hear that the CME was prepared to accept spec limits indicating that he has reached a conclusion.
On the eve of the first hearing the Wall Street Journal and other media outlets, reported that the CFTC plans to issue a report next month that would place the cause for last summer’s run up in crude oil markets on speculators in contrast to previous reports by the agency that indicated the run up was due to supply/demand factors and which pointed out that index fund allocations to crude oil actually dropped during the run up. It is only worthy of note because there appears to be dual realities competing: those that believe speculators in the form of investors in long-only commodity indexes undoubtedly where the cause of the 2008 run-up in crude oil and those that believe fundamentals—albeit not the simple supply and demand fundamentals typically examined—were the cause.
It seems counterproductive to hold hearings and debate policy among people with competing views of reality. You could come up with the perfect solution to a problem that doesn’t exist or create a new problem trying to fix something that is not broken.
The deeper question the hearings addressed is, if limits would be applied by the exchange or the CFTC — as is done in the agricultural markets — and what will happen with the hedge exemption that allows swap dealers and index traders to hedge long cash exposure in the futures markets. That discussion goes a little deeper and was discussed more in depth on the July 28 panel where mainly traditional commercial players in the futures markets complained about the affect the growth of commodity index funds have had on energy prices.
The arguments have become somewhat common. Crude oil has rallied despite bearish fundamentals: rising inventories and falling demand. Sean Cota of Cota and Cota Inc. made this point speaking on behalf of the Petroleum Marketers Association of America. He also stated that crude oil has risen precipitously in the last three months despite the dollar being flat over the same period; which indicates the importance of doing your own due diligence as crude oil and the dollar has been nearly perfectly negatively correlated.
While Cota is correct that the market appeared to defy other traditional fundamentals during this summer’s rally, that is not unique. If markets behaved a specific way based on a group of known facts everyone would make money—though they would have a hard time finding someone to take the other side of their trades.
The idea that someone could walk into a government agency and state something completely false is disturbing, though I may be being naïve. We have seen this with the current health care furor. I do not want to weigh in on that debate other than to say, if this is so bad why not make cogent arguments against it rather than conspiratorial rantings of government run death panels. Unfortunately this approach has precedence and produces results. As noted here before, Congress appeared to be herded into TARP by vague warnings of impending doom by so called experts who failed to spot the problem and seemed afraid to ask those experts for specifics.
Perhaps this is because fear moves people to act while logic may invite more analysis. Though we hope the CFTC acts according to evidence and not the rantings of certain Congressmen who jumped on the speculators are responsible bandwagon and don’t appear capable looking beyond that.
Tags: CFTC, hedge exemption, speculation
