[Marxism] Oil speculation--what's new?

bauerly at yorku.ca bauerly at yorku.ca
Sun Jun 8 19:46:45 MDT 2008

Today, Index Speculators are pouring billions of dollars into the commodities
futures markets, speculating that commodity prices will increase. Chart One
shows Assets allocated to commodity index trading strategies have risen from
$13 billion at the end of 2003 to $260 billion as of March 2008,5 and the
prices of the 25 commodities that compose these indices have risen by an
average of 183% in those five years!

Commodity Index Investment vs. Spot Prices

The next table looks at the commodity purchases that Index Speculators have made
via the futures markets. These are huge numbers and they need to be put in
perspective to be fully grasped.

In the popular press the explanation given most often for rising oil prices is
increased demand for oil from China. According to the DOE, annual Chinese demand
for petroleum has increased over the last five years from 1.88 billion barrels
to 2.8 billion barrels, an increase of 920 million barrels.8 Over the same
five-year period, Index Speculatorsʼ demand for petroleum futures has
increased by 848 million barrels. The increase in demand from Index Speculators
is almost equal to the increase in demand from China!

Index Speculators have now stockpiled, via the futures market, the equivalent of
1.1 billion barrels of petroleum, effectively adding eight times as much oil to
their own stockpile as the United States has added to the Strategic Petroleum
Reserve over the last five years.

Index Speculator Demand Characteristics

Demand for futures contracts can only come from two sources: Physical Commodity
Consumers and Speculators. Speculators include the Traditional Speculators who
have always existed in the market, as well as Index Speculators. Five years
ago, Index Speculators were a tiny fraction of the commodities futures markets.
Today, in many commodities futures markets, they are the single largest force.15
The huge growth in their demand has gone virtually undetected by
classically-trained economists who almost never analyze demand in futures

Index Speculator demand is distinctly different from Traditional Speculator
demand; it arises purely from portfolio allocation decisions. When an
Institutional Investor decides to allocate 2% to commodities futures, for
example, they come to the market with a set amount of money. They are not
concerned with the price per unit; they will buy as many futures contracts as
they need, at whatever price is necessary, until all of their money has been
“put to work.” Their insensitivity to price multiplies their impact on
commodity markets.

Commodity Futures Market Size

As money pours into the markets, two things happen concurrently: the markets
expand and prices rise. One particularly troubling aspect of Index Speculator
demand is that it actually increases the more prices increase. This explains
the accelerating rate at which commodity futures prices (and actual commodity
prices) are increasing. Rising prices attract more Index Speculators, whose
tendency is to increase their allocation as prices rise. So their
profit-motivated demand for futures is the inverse of what you would expect
from price-sensitive consumer behavior.

You can see from Chart Two that prices have increased the most dramatically in
the first quarter of 2008. We calculate that Index Speculators flooded the
markets with $55 billion in just the first 52 trading days of this year.19
That’s an increase in the dollar value of outstanding futures contracts of more
than $1 billion per trading day. Doesn’t it seem likely that an increase in
demand of this magnitude in the commodities futures markets could go a long way
in explaining the extraordinary commodities price increases in the beginning of

There is a crucial distinction between Traditional Speculators and Index
Speculators: Traditional Speculators provide liquidity by both buying and
selling futures. Index Speculators buy futures and then roll their positions by
buying calendar spreads. They never sell. Therefore, they consume liquidity and
provide zero benefit to the futures markets.

Is this what Congress expected when it created the CFTC?

The CFTC Has Invited Increased Speculation

When Congress passed the Commodity Exchange Act in 1936, they did so with the
understanding that speculators should not be allowed to dominate the
commodities futures markets. Unfortunately, the CFTC has taken deliberate steps
to allow certain speculators virtually unlimited access to the commodities
futures markets.

The CFTC has granted Wall Street banks an exemption from speculative position
limits when these banks hedge over-the-counter swaps transactions. This has
effectively opened a loophole for unlimited speculation. When Index Speculators
enter into commodity index swaps, which 85-90% of them do, they face no
speculative position limits.

The really shocking thing about the Swaps Loophole is that Speculators of all
stripes can use it to access the futures markets. So if a hedge fund wants a
$500 million position in Wheat, which is way beyond position limits, they can
enter into swap with a Wall Street bank and then the bank buys $500 million
worth of Wheat futures.

In the CFTC’s classification scheme all Speculators accessing the futures
markets through the Swaps Loophole are categorized as “Commercial” rather than
“Non-Commercial.” The result is a gross distortion in data that effectively
hides the full impact of Index Speculation.

Additionally, the CFTC has recently proposed that Index Speculators be exempt
from all position limits, thereby throwing the door open for unlimited Index
Speculator “investment.” The CFTC has even gone so far as to issue press
releases on their website touting studies they commissioned showing that
commodities futures make good additions to Institutional Investors’ portfolios.

Also the decline of the dollar accounts for 20-30% of the rise in oil prices

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