Energy commodities and the anti-speculation crowd

The CFTC has seen a big spike of late in public comments on its proposed position limits for energy trading.

Reuters’ John Kemp, never shy of whipping up a spreadsheet, has charted the increase:

John Kemp/Reuters - CFTC responses to proposed position limits, volume, charted by date

The story is that the big spike in submissions comes from form letters sent via the likes of the ‘Stop Oil Speculation (S.O.S.) Now‘ group — as economist Philip Verleger first pointed out to us, and Platts’ The Barrel blog also notes.

On perusing some of the submissions last week, by far the majority of form letters seemed to have come via this website, run by Americans for Fairness in Lending, a coalition of unions, consumer and investor groups that mostly focuses on financial sector reform and consumer credit issues. They offer a flexible form email that allows users to pick and choose from four pre-written paragraphs, and add their own text if they wish. The second paragraph reads:

Wall Street’s speculative trading in oil not only hurts the economy, but hurts every American who pays excessive prices at the pump, for groceries, home heating oil and everything related to transportation.

Verleger, who studies the speculation issue closely and is drafting his own, much lengthier, submission, is somewhat exasperated by the vast number of comments from people who presumably have little understanding of commodities markets. However John Kemp points out that, regulators and market professionals shouldn’t dismiss them out of hand:

They show how many members of the public still believe prices have been driven by speculative and financial forces, rather than physical supply and demand. Counter arguments put by many commodity dealers and some economists have not won much traction with the public at large.

And that matters. The CFTC and Congress are ultimately responsible to voters. Rational or not, if there is enough pressure to tighten regulations and impose limits, the Commission and legislators will respond.

The more difficult divide to bridge, however, is that of swaps dealers and other financial traders. Kemp, having apparently gone through the many comments in search of the non-form-letter submissions, notes that the International Swaps and Derivatives Association for example is particularly concerned about the limits across positions (Izabella Kaminska at FT Alphaville and Olivier Jakob from Petromatrix have previously written about this issue).

On the other side of the fence are the Petroleum Marketers’ Association of America and the world’s second-largest container shipping company, Mediterranean Shipping Company, which argue that price discovery and hedging purposes of the markets have been compromised by passive and active speculation.

Related links:

Digging deeper into the CFTC’s position limits - FT Alphaville
Is the CFTC trying to restrict physical traders after all? - FT Alphaville

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