Speculators may get a bad rap in the public’s eye, but those involved more closely with commodity markets will usually point out that speculators play a useful role: they provide liquidity and counterparty bets for those companies requiring long-term certainty over pricing.
Without the purely speculative parties, those real-world users of commodities would only be able to set prices with each other, which might not always be possible.
Most of the informed debate over the CFTC’s proposed position limits on energy speculators takes this as a given. But the physical energy users themselves believe there can be too much of a good thing.
Reuters’ John Kemp has read through the submissions to the CFTC’s proposals from big energy users and concludes that they’re not so sure about the benefits of liquidity.
“…the customers for whom this liquidity is being provided disagree. There is widespread scepticism about whether they really want this much liquidity,” he writes.
Submissions from Mediterranean Shipping, the Air Transport Association and the Industrial Energy Consumers of America have all urged the commission to adopt the limits, Kemp observes.
They argue that the sheer volume of financial traders, particularly passive investors, has grown so large as to counter their useful role as a counterparter for hedging bets with physical oil buyers. The IECA goes furthest, calling for all passive speculators to be banned.
The role of passive investors in commodities markets is particularly complex, with many arguing that they do not seriously affect prices, and some pointing out that they might work in favour of physical commodity users. There is a whole other debate about whether those passive investors are in fact getting what they bargained for, especially when energy markets are in contango.
But there is little doubt that interest in investing in energy as an asset class is here to stay.
Kemp says it comes down to who has the right to invest in energy futures:
This is the crunch point. Do commodity derivatives exist solely to permit physical hedging and price discovery, or are they also a financial asset that allows a much broader range of participants (both individuals and institutions) to hedge inflation risks, diversify and take a view on the future?
For example, US Commodities Funds, which operates some of the biggest passive funds, says energy prices affect everyone, and investors have as much right to participate in these markets as anyone else.