Getting a grip on the evidence about what caused our recent oil price craziness has been especially difficult. There's been rampant speculation about whether commodity trading fueled the 2008 spikes. As explained in today's Wall Street Journal, Traders Blamed for Oil Spike: CFTC Will Pin '08 Price Surge on Speculators in a Reversal From Bush Findings, the U.S. Commodity Futures Trading Commission (CFTC) intends to publish a report during August suggesting speculators played a significant role in driving wild swings in oil prices.
"In a contentious report last year, the main U.S. futures-market regulator pinned oil-price swings primarily on supply and demand. But that analysis was based on 'deeply flawed data,' Bart Chilton, one of four CFTC commissioners, said in an interview Monday. The CFTC's new review... adds fuel to a growing debate over financial investors who bet on the direction of commodities prices by buying contracts tied to indexes. These speculators have invested hundreds of billions of dollars in contracts that were once dominated by producers and consumers who sought to hedge against oil-market volatility." [Chart from Reuters via Wall Street Journal]
Not so fast, or we'll throw you into the dark pool. Commodity exchanges are crying foul. Craig Donohue, the CEO of CME Group, a large derivatives marketplace, says "We have not seen any empirical evidence that index funds and speculators distort prices, as has been widely alleged, nor is there any proof that putting position limits on these market participants will have any positive effect on the marketplace.... We are deeply concerned that inappropriate regulation of these markets will cause market participants to move to dark pools and other unregulated markets, causing irrevocable harm to the entire U.S. economy. We look forward to having an open dialogue on this topic with the CFTC, elected officials and industry participants to ensure the continued safety and soundness of an already highly regulated financial market, which remained one of the best operating components of our economy during the credit crisis of recent months." Donohue was scheduled to appear before the CFTC today to discuss position limits for energy futures trading.
Better evidence? According to the Wall Street, last year, then-acting CFTC chairman Walter Lukken "told the House Agriculture committee that CFTC's economists 'did not find direct evidence that speculation was driving up prices.' ...In preparing its 2008 report, the CFTC sought information from swaps dealers about their off-exchange derivatives transactions." But Chilton said "data the agency gathered was incomplete, with some players providing partial or no information.... [He] said the new report will contain a more-thorough analysis of the investors in contracts tied to oil and other commodities, and reveal cases in which single traders hold massive market positions."