CFTC prepares crackdown on speculators
Energy traders face limits on positions
I called for this long ago. For those that questioned my wisdom.
I wouldn't be too sad if they got rid of physical commodity ETF's.
Meanwhile you should read this:
http://www.edhec-risk.com/features/...Position Paper Oil Prices and Speculation.pdf
The big point is that with all of its failings, the market sent a warning, the populace doesn't like this painful message and so it blames the messenger. With oil at current production levels and current energy technologies in use a large global expansion will drive oil prices skyward. Furthermore that price spike will tend to prick other asset bubbles -- in our case the credit and real estate bubbles. But the main problem isn't speculators (though there may be some problems there). The true problem is probably that easy oil is over. We may even have reached something like peak oil. In that case expansions, whether they happen here or in a decoupled Asia for example, will cause prices to rise -- potentially a lot once this supply glut is worked through -- and those price rises if they continue high enough will unfortunately put a ceiling to growth or cause another downturn.
The markets are telling us we need to find an energy source other than oil, or that we need to find a whole lot of oil. Oil prices could fall to $30 again but the general message would still be the same until prices failed to rise despite an economic expansion.
But lower market prices can pose a problem -- lower oil investment, potentially lower alt energy investment, and a false sense of security. People may forget the energy crisis or believe that because of speculators the markets were crying wolf. Remember though that in the old fable the wolf ends up getting the sheep (and maybe the boy too). This is where the gov't can step in, hopefully with a longer memory than the society's lowest common denominator, and heavily push alt energy, battery technology, the whole host of potential solutions to get us away from oil's monopoly on transportation energy, activities which will also be economic stimulus as is necessary during a credit-bubble implosion of the variety which judging from history can last five or ten years.
And of course gov't can screw things up -- like when Iowa/the Farm Lobby criminals decide to hijack biofuel production and push up corn and bean prices needlessly when sugar would be better, therefore causing widespread hunger in the world via higher energy prices. THAT's real manipulation. With farm states having such an out-sized Senate representation is is always a danger.
Back to the CFTC, remember that volatility in markets may increase with over-regulation. I remember a great article in the FT about how people once upon a time blamed volatility in potato prices on potato futures. So politicians shut down the futures markets. Volatility *increased*. Or look at the Baltic Dry Index -- no speculators allowed and it's one of the most volatile markets in the world.
That said lowering position limits seems like a decent idea to me, esp as they look into swaps and so on. What regulators should seek for commodity markets is a heterogeneity amongst speculators. Limiting position sizes may help here.
One interesting idea would be to incentivize trading in back months and/or calendar spread trading in futures as these activities add liquidity to the futures chain where hedgers actually need it rather than only in the front month. The goals of regulation should be to create accurate price discovery and facilitate bona-fide hedging.
Maybe we can imagine that trend followers can exacerbate volatility or bubbles while contrarian and value traders may tend to reduce it. The big ETF's might add to the herding mentality.
But enough! I must speculate in the market...