Recently, there have been mounting efforts to regulate oil-price speculation. Yet curbs on speculation in oil probably will decrease volatility but push prices lower only in the short term.
The US futures regulator, the Commodity Futures Trading Commission is weighing restrictions on non-commercial futures trading on the oil markets, deliberation that in itself has set off speculation about what would happen to oil prices that have swung in a $110 range just within the past year.
Speculators, after all, can place bets in both directions, something the market has shown in vivid detail since the summer of 2008’s dramatic run-up that ended with $147 a barrel in mid-July.
As demand dried up and the economy cratered in September, oil prices went into freefall, tumbling into the mid-$30 range by December. Another rally followed that sent oil prices above $70 at various times.
Opponents of the trading limits say the market is merely following normal moves that ultimately end up in proper price-setting.
Someone said to me they have a hard time following the logic. We had some evil speculators manipulate the price up in crude. How did they manage to exit their positions at a profit? What happened to them as the price of crude adjusted from $147 to the mid-30s?
Some analysts believe the past $25 or so of last summer's oil run was probably due to speculation, but the price otherwise rose due to fundamentals.
We had such momentum coming from the non-commercial/investment side that it carried us well beyond where the fundamentals actually determined, Moreover, some think oil prices once again have outpaced fundamentals, and the market is due for another violent correction.
Indeed, demand figures continue to indicate use is deteriorating, with the latest figures from the US Energy Information Administration showing US crude supplies at their highest levels in more than six months.
Consequently, some analysts think oil is headed much lower, to a range of $17 to $25 a barrel as the annual trough hits in December. The underlying fundamentals have been as bearish as they have been in quite some time. We have burdensome supplies to meet demand. The price needs to come lower to find some new buying.
However, not everyone believes oil is heading lower.
Some economists believe prices are going higher, due in part to expected economic growth coming next year. Other oil bulls see a trend in which investors fearful of huge government liquidity injections into the economy will turn to oil as a natural inflation hedge.
Such potential for upward price moves would only bolster the case of those targeting speculators.
If the economy starts to turn around here in another year or so we're going to be right back in the same squeeze.
In that case, less volatile oil trading would assuage some of the anxiety of those with headaches from dealing with the massive price swings of the past year. The best thing that could happen is that we lose the big price swings and have a calmer market. I would love to see that happen.
By Chodechai Suwanaporn [email protected]
Source: Fiscal Policy Office / www.fpo.go.th