Curb oil speculation? Why that's folly!

Regulators are gearing up to set limits, but that's just a good way to encourage hoarding.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Jon Birger, senior writer

launcher.gif
Has the recession caused you to change your spending and saving habits?
  • Yes, permanently
  • Yes, but only for a short time
  • No

NEW YORK (Fortune) -- Word is that the Commodities Futures Trading Commission is set to do an about-face on the role speculators play in setting oil prices. According to the Wall Street Journal, a CFTC study set to be released next month will find speculators to blame for last year's high prices. Presumably, the study will provide some intellectual justification for the Obama administration's plan to rein in oil speculators.

I'm on record in this space arguing that traders who flip futures contracts -- in other words, speculators -- cannot have a material impact on price if they're never taking physical delivery of the commodity. Until now, that's been the position of the CFTC, and it has also been the finding of countless academics who've studied this subject.

Yes, oil companies also faulted speculators for high prices last year, but who can blame them for wanting out of the political firing line? Oil company traders knew full well that the commodity funds that buy and sell futures contracts are not equipped to take or make delivery of oil. Oil refiners understood that speculators must sell their futures contracts before they expire. That's why the near-future price of oil -- the price of oil for September delivery, say -- cannot get too far away from the realities of supply and demand in the physical market. No oil company trader worth his salt is going to pay an above-market price to a commodities fund manager who is under time pressure to sell.

Indeed, this helps explain why at the peak of the oil market last June, the average commodities hedge fund, as tracked by the FTSE CTA Managed Futures Index, had a minus-2.2% trailing 12-month total return. Speculators' poor returns also demonstrate that a lot of them were, contrary to popular myth, betting that oil prices would go lower, not higher. In other words, they were speculating the wrong way.

So what happens if the anti-speculator lobby gets its way? Stop Oil Speculation Now, a coalition of airlines, gas-station owners, and heating-oil companies, wants legislation that would put strict limits on futures trading by anyone who does not intend on taking delivery of oil. U.S. Rep. John Larson of Connecticut, chairman of the House Democratic Caucus, has introduced legislation that would do just that.

My response: Be careful what you wish for. If you tell investors that they have to take delivery in order to invest in oil, that's exactly what they will do. They will store oil in every onshore oil tank or offshore supertanker they can get their hands on, thereby siphoning off oil that would otherwise be available to consumers. It will be a replay of the late 1970s, when the Hunt Brothers took delivery of 10% of the world's silver supply, causing silver prices to quadruple.

Don't believe me? Consider what happened in January, when the price of oil futures four months out was $15 a barrel higher than the spot price, which incentivized oil companies and investment banks to store oil like crazy.

So if Congress and President Obama really want to enact regulation that encourages hoarding, I say go right ahead. It will prove my point -- albeit at the expense of 300 million American consumers. To top of page

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More
Sponsors
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.