|As the oil prices saga continues, there are finally some initial counters making their way into the market consciousness that might have some impact on the price speculation.
The first piece of news involves the “Enron Loophole.” Eight years ago energy traders promoted legislation exempting the electronic trades of energy futures in the United States from U.S. regulation. With new legislation linked to the Farm Bill, electronic energy traders must provide transparency and an audit trail so that potential market manipulation and excessive speculation can be tracked.
However, there is more that needs to be considered. Foreign “dark” markets, like the Intercontinental Exchange, lack the same transparency found in more traditional markets leading to questions about the possibility of market manipulation.
And then there is the “swaps loophole” recently highlighted by the Senate committee testimony of Michael W. Masters, managing member/portfolio manager, Masters Capital Management, LLC. Masters outlined how pension funds and other institutional investors have entered the game lately with an enormous impact. Through a swap agreement with an investment bank, these funds can now make unlimited contract trades in the futures market.
As the Petroleum Marketers Association of America stated on the subject, some experts believe that as much as 60 percent of the cost of a gallon of gasoline or heating oil can be attributed to pure speculation and abusive — even manipulative — trading practices, yet most trading is “dark” and federal authorities can neither fully police or see the data in the majority of the trading markets.
PMAA further stated that estimates indicate financial investors now control one third of the commodities markets, or $150 billion. This represents a 1,000 percent increase in less than five years.
The second major piece of news is an announcement by Saudi Arabia that it intends to increase production. Similarly, there is a stronger push than ever, in this election season, to open up more of the restricted areas in the United States to oil production.
Perhaps these developments, when combined with quantifiable drops in demand in the United States and elsewhere will add some doubt to the mantra that astronomical and ever-rising crude prices are the natural thing and here to stay for some time. Just how much doubt and how deep an impact these stand to have on crude prices in the near future is anyone’s guess.
As a side note, we forgot to credit last month’s cover photo. It was provided by Dispatching Solutions provider FleetMatics. We apologize for the omission.