Let this be an early warning

Speculators may be banned from trading commodities in the near future if this proposal is accepted in the US. This proposal may serve as an early warning to speculators to be careful now and not be caught off guard if there are some changes in the trading regulation soon. Will this be the start of Government's interventions in the commodities markets to reduce the eratic spike in the oil prices? Of late, oil prices have shot passed the roof drastically due to various factors including speculation and indeed if not "tackled" soon, may cause poor civilians to riot and economies into recession or worse into stagflation. My comments are in red.



Bloomberg: The chairman of a Senate oversight committee has said he is considering legislation to place limits on large institutional investors in commodities markets, which have posted record prices this year in agricultural products and oil.
I believe the above is one of the many measures which are being weighed on to stem speculation by market players in view of the heightened price volatility in the commodities market in recent months. However, I cannot totally agree that speculators are solely to be blame for the increase in oil prices.


The legislation would be aimed at speculators and other investors who use commodities as a way to hedge against swings in other investment instruments like stocks and the dollar, said Joseph Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, at a hearing Tuesday.
This view was echoed by the OPEC, Royal Dutch Shell, European Commission(EC) and many industry experts. The EC says " commodity market speculators must bear at least some of the blame for the soaring global food prices and their activities need to be carefully monitored".

Crude oil reached $132.25 a barrel Wednesday, the highest price ever, and it has almost doubled in the past 12 months. Wheat, corn, soybeans and rice have all set record highs this year on the Chicago Board of Trade, spurring food inflation. The Reuters/Jefferies CRB index of 19 commodities surged 31 percent in the year that ended April 30. "We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can't afford it," said Lieberman, Independent of Connecticut. The plunging value of the dollar, the U.S. housing crisis and widespread problems in the banking sector have led investors away from traditional instruments and toward commodities, witnesses said.


Jeffrey Harris, chief economist for the Commodity Futures Trading Commission, told the committee it was clear that there were more institutional investors in commodities. He said they have not systematically driven up prices. Prices "are being driven by powerful fundamental market forces and the laws of supply and demand," Harris said.
It is ironic as most economists comments that I read are almost identical with this guy. Similarly, the US Energy Secretary was quoted as saying the record oil prices fairly reflect tight supplies and strong global oil demand, and speculators were not at fault for pushing oil prices up.


Michael Masters, a portfolio manager for Masters Capital Management, told the lawmakers that investors were buying up commodities and holding their positions, creating an artificial premium. Assets allocated to commodity index trading strategies rose to $260 billion as of March, from $13 billion at the end of 2003, he said.
Wow, an increase of 20x more funds available for hedging and trading within 4 years! More monies to drive the markets. Many funds launched during the passed 2 years are targeting investment in commodities, may it be stocks or futures.


Senator Claire McCaskill, Democrat of Missouri, said the CFTC might be failing to adequately regulate this speculative investing and tighter regulations might be needed. "The people of America are about to pick up pitchforks" as rising food costs pinch consumer budgets, she said. The U.S. Department of Agriculture said Monday that it expected food prices to rise as much as 5.5 percent this year, up from an earlier forecast of 5 percent and the fastest increase since 1989.
Agree with her comments on CFTC totally. This is one area regulators need to look at, and fast.


Harris of the CFTC cautioned against a hasty reaction to recent volatility in commodity markets. "Diminishing the ability of futures markets to serve their hedging and price-discovery functions would likely have negative consequences for commerce in commodities and ultimately for the nation's economy," he said.
Well, the man has to protect his self interest and business. He has to sound like he is a proponent of efficient market theories/hypothesis.

But Masters, of Masters Capital Management, said the CFTC was turning a blind eye toward market-distorting speculation. "Institutional investors are one of, if not the primary, factors affecting commodities today," he told the committee. "As money pours into the markets, two things happen concurrently: the markets expand and prices rise."A report released Wednesday by Greenwich Associates argued that surging commodity prices reflect rising involvement of speculative investors. Greenwich, a research firm, said a third of those investors had been in the markets for less than three years.

Goldman Sachs Group and Morgan Stanley top the rankings of derivatives dealers, followed by Barclays Capital Group and JPMorgan Chase.
Yes, regulators and legislators should start looking at these companies' futures trading records, transactions and contracts immediately.

Masters proposed that the government prohibit commodity index investing as a vehicle for pension funds, curtail swaps trading and reclassify some positions to distinguish between legitimate physical hedgers and speculators.
On a larger context, my solution to contain eratic spike of futures prices while taking into the account of ever increasing demand would be to 1) pressure the US to start appreciating its dollar again, 2) start tightening and amending the rules and regulations pertaining to futures trading to minimise speculation or manipulation (egs increased deposit amount of futures contract, requiring all buyers/sellers stating their reason for buying/selling with supporting documents and investigate all big programmed buying/selling contracts etc) and 3) sudden concerted intervention by Governments in the futures markets(but I suspect it will be difficult to be implemented as it would be costly and subject to heavy criticism). I will not recommend stopping futures trading all together. I know it will be difficult to determine who are genuinely buying the product for hedging, trading, speculating or manipulating. Intervention may distort efficient pricing and against the free market spirit but if nothing is done now, how sure are you that the price we are buying now are not distorted and efficient? (topic was discussed here previously) .

* Some news on the effects of higher oil prices - Singapore's petrol prices could reached S$2.50 (or RM5.80) per litre by year end. If oil price were to hit US180 per barrel, petrol price is the US could reached US6.00 (RM19) per gallon or RM5 per litre [1 gallon=3.79 litres].

* In Paris, fisherman clashed with riot police over rising fuel which disrupted operations at ports and oil terminals.

* In China, at least 5 Chinese provinces' petrol stations are out of diesel or limited diesel for sale as oil firms divert supply from the price-capped retail sector to avoid further losses due to soaring crude oil.

* Did I hear correctly the Senates are planning to sue OPEC for their unwillingness to increase production? Are these people getting despair and running out of solutions to tackle the current issues in hand?

* Have not even mentioned the effects of rising crude oil prices on transportation, food prices and on other products yet.

* Rising oil prices will not have any effect on these people. The top 10 richest in Malaysia based on Forbes survey are:
1) Robert Kuok, US$10 billion.2) Ananda Krishnan, US$7.2 billion.3) Lee Shin Cheng, US$5.5 billion.4) Teh Hong Piow, US$3.5 billion. 5) Lee Kim Hua(Genting) & family, US$3.4 billion.6) Quek Leng Chan, US$2.4 billion.7) Yeoh Tiong Lay & family, US$2.1 billion.8) Syed Mokhtar Al-Bukhary, US$1.8 billion.9) Vincent Tan, US$1.3 billion.10) Tiong Hiew King, US$1.1 billion.