Oil economist Philip K. Verleger points out a ‘dog that didn’t bark‘ in his latest weekly newsletter: home heating prices in the US are not skyrocketing, despite the extra cold conditions.
The reason for this happy and unremarked-upon turn of events, he writes, is that passive investors going long heating oil have contributed to market contango (in which long-dated contract prices are higher than current contracts). This in turn creates an incentive to store more of the products than has been set aside in previous cold winters, which in turn means no great supply squeeze and no dramatic price jumps.
First, stock levels in 1989 versus 2009:
Then, prices for both those years, taken weekly as a percentage of the year’s average – you can see they nearly doubled towards the end of 1989:
1989 reached 194 per cent, while 2009 only reached 123 per cent.
Then, the open interest:
In 1989, open interest in heating oil futures was less than 100,000 contracts for much of the year. In 2009, open interest average 276,000 contracts.
He sees this as a success of the market, one that the CFTC should keep in mind when it holds a public hearing on position limits for energy speculators on Thursday. Rather than interfering, he says, the Commission should celebrate the fact that it didn’t hamper this beneficial market mechanism.
Verleger has published this week’s note in full on his website for those who want to read more.
The regulatory muddle in energy markets (FT Alphaville, 08/01/10)