Oil Speculation

This topic is rich today! Other titles come to mind:

1973 all over again
Political Stupidity Trumps Hard Facts
What to Oil and Onions Have in Common

At least a year ago, while oil prices were still threatening global economic development, the Commodity Futures Trading Commission (CFTC) was embarking on another round at attempting market manipulation through government regulation to ensure price stability of this precious and vital commodity. Congress even started at least nine bills, presumably in case the CFTC didn’t do their bidding. Luckily for consumers, rationality and reason prevailed that time. Hopefully the history of onions helped the first debate.

Rinse and repeat
Not to be dissuaded by circumstances, they’re at it again. Like every bad idea bureaucrats sink their teeth into, giving up and letting go is not an option. The Financial Times summarizes the present reality of another move to "fix" the "volatility" in oil prices yet again.

The fact that the so called "mess" they are complaining about happens to be perfectly in line with what any clear-headed thinker should have expected is beside the point (to them). As Craig Pirrong at Seeking Alpha put it:

...the past two years have been among the most volatile in the memory of most living people–you have to go back to the 1930s to find anything remotely similar. In 2007-FH2008, Chinese (and Asian growth generally) greatly spurred demand for commodities. Note that in addition to commodity prices, shipping charter prices skyrocketed, even though the price of something perishable like transportation on a ship can hardly be distorted by speculative buying, because it has to be consumed and hence is impossible to hoard. That was followed by a financial collapse and economic recession of severities unseen since aforementioned 1930s. Look at every measure of uncertainty, notably such things as the VIX volatility index. These things have been at dizzying heights since last August (and had begun their rise even earlier, in 2007). What would be weird is if oil prices (and commodity prices generally) HADN’T been volatile during this period.

He goes on to provide yet another round of reason and fact-finding to refute the notions spewing from the halls of Congress.

Mr Pirrong also provides us with a nice graphical representation of trading data. Notice that plunge in oil prices from 2008 to 2009, and speculative long futures contracts during that time, directly contradict precisely the claims of the fools in Congress and the CFTC. Not that you should expect bureaucrats to see the light when you shine it in their face. In spite of the clear evidence to refute the idea, we can at least hope the CFTC pursues this because of congressional pressures to please the lemmings in the general population who don't know any better but to demand someone look into it.

Last time the world financial system nearly collapsed, OPEC used it as the impetus to band together in a more concerted effort to ensure their revenues were not ruined by American policy.

Independently, the OPEC members agreed to use their leverage over the world price-setting mechanism for oil to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the end of Bretton Woods, as well as the recent failure of negotiations with the "Seven Sisters" earlier in the month.
(Source wikipedia)

It’s unlikely the price controls on oil in the U.S. helped matters. Some say the world won't experience inflation like we did in the 70s, but the global quantitative easing is ruining the value basis for currencies everywhere like massive new stock issues dilute the values of equities. Between the potential for CFTC regulation of futures markets, and the potential for ruinous monetary and fiscal U.S. dollar policies, America once again appears to be setting up for another round of high oil and gas prices.

At least you now know you can confidently brush off whatever nonsense someone tries to feed you when they use open interest in oil futures to tell you where the price is going next. Like any investment, you actually have to know something about the fundamentals of the market to make a rational informed decision.

While the last few weeks have seen some profit taking and softness in crude spot and futures prices, we’re still bullish on the intermediate and long term price potential of oil. If Congress and the CFTC does nothing, human nature and normal supply and demand will provide price support. If regulation ensues, we might learn something from the onion (depending on what actions are taken) and have more opportunity to profit from this essential commodity.