An independent report showing that record amounts of speculative investment drove oil prices to record peaks in 2008 confirms that stronger market regulation is needed, federal lawmakers said.
Institutional investors pumped more than $60 billion into major commodity indexes, resulting in the purchase of approximately 187 million bbl of West Texas Intermediate crude oil futures and a nearly $33/bbl increase in their price, according to the study by Michael W. Masters, portfolio manager at Masters Capital Management, and Adam K. White, research director at White Knight Research & Trading.
Starting on July 15, however, index speculators made a 180-degree turn and pulled about $39 billion from those indexes which led to the sale of about 129 million bbl of WTI crude futures and a drop of some $29/bbl in their prices by Sept. 2, the study's authors continued.
"We went into this with fairly open minds. We recognize that money moves markets, but in this case we saw an unusually significant amount of money come into the market and oil prices increase, followed by a significant withdrawal in July and a decrease in prices," Masters told reporters at a briefing.
The findings confirmed several federal lawmakers' suspicions and they announced that they will try to make stronger commodities regulation part of any comprehensive energy bill that is produced in the next few weeks. The study also came out the day before the US House Agriculture Committee plans to hold a hearing on speculation and oil commodities. The US Commodity Futures Trading Commission also expects to issue what is now being called a swaps report by Sept. 15.
'Unbelievable, unbridled speculation'
"We have known for some long while that speculators have played a role in where oil prices have gone. We made the case that unbelievable, unbridled speculation has driven and then broken the market. This report shows how oil speculators controlled the market while the federal agency which should be protecting American consumers has been dead from the neck up," Sen. Byron L. Dorgan (D-ND) said at the briefing.
"This analysis illustrates that when oil speculators poured large amounts of money into oil markets, prices skyrocketed just as they hoped. It also shows that when Congress began pressing the CFTC and developing legislation to end dark oil markets, speculators ran for the exits and pulled $40 billion out of the commodities market, dropping the price of oil by about $40/bbl. This is why I continue to hold up the CFTC nominations and called for the inspector general's investigation into the CFTC's bogus reports that seem to be pushing an agenda rather than the truth," said Sen. Maria Cantwell (D-Wash.).
"Large numbers of dollars by a very few investors have driven the oil commodities market. Many of us here have pushed the CFTC to do its job. It has barely been an inch in front of us," she added.
Other federal lawmakers also expressed skepticism about declarations by the CFTC and its acting chairman, Walter L. Lukken, that supply and demand has been primarily responsible for oil price movements. "The only supply and demand this report shows is the supply and demand of money. As speculators pour more money into the energy market, prices go up. As they pull their money out, prices go down," said Rep. Bart Stupak (D-Mich.), chairman of the House Energy and Commerce Committee's Oversight and Investigations Subcommittee.
"The evidence is undeniable for consumers, policymakers and everyone who has a stake in our economy. I personally wonder how we can explain the continued decline of crude oil prices when so much Gulf of Mexico production and refining capacity remains shut in following Hurricane Gustaf," said Rep. Rosa L. DeLauro, who chairs the House Appropriations Committee's Agriculture Subcommittee.
Supply, demand in balance
Masters said that he and White used information compiled by the CFTC and the US Energy Information Administration as well as their own investment sources for their report. "It is important to note that during the first six months of 2008, actual worldwide inventories for crude oil were essentially flat: They did not change. Therefore, supply and demand were in balance during this time period. Clearly, supply and demand cannot fully explain crude oil's dramatic rise and fall during 2008," it said.
Neither can a weak US dollar, it continued. In 2008, the currency never weakened more than 7% but the price of WTI rose by as much as 50%. "Note that oil traders' fixation with the US dollar is prima facie evidence of the 'financialization' of commodities. Most likely, the US dollar's impact on commodity futures prices comes not through changes in real world supply and demand (which would be seen as actual supply and demand data), but instead through the inflow and outflow of investment funds from foreign speculators," the report said.
It suggested that the period from the end of May to mid-July was pivotal for commodity futures markets and institutional investors despite positions being reduced slightly and oil prices rising further.
"But a debate was raging in Washington DC over the role that speculators were playing in the rise of the price of oil. There were multiple hearings in both houses of Congress during this time, focused on the effect that speculators were having on food and energy prices. There were multiple pieces of legislation introduced that would have cracked down on speculation. Both the Senate and the House had substantial bills proposed by the majority that made significant progress during July," it said.
The report noted that the CFTC also announced multiple initiatives and investigations which were aimed at determining what role speculators played in the rapid oil price increase. The commodities regulator made special calls on swaps dealers for information related to index speculation and other matters. It also obtained agreements from foreign regulators to increase reporting for markets the CFTC doesn't regulate such as the InterContinental Exchange, the study said.
Concern led to pullout
"Although institutional investors typically buy and hold investments for the long term, it is likely that a number of index speculators were concerned enough by what was occurring in Washington to pull their money out of commodity index investments," it said.
The report concluded that if Congress acts to restrict speculation, price volatility will be reduced and food and energy prices will cone down as excessively speculative money flows out of the markets. Cantwell agreed. "If we saw the fear of better regulation drop gasoline prices by 50 cents/gal, what would true regulation do? We could see prices drop to the $70-80/bbl level that many oil company executives have said is the real price," she said.
"The American economy is being killed by excessive prices these speculators create not only in oil, but in 22 of the 25 major indexes. The CFTC has its head in the sand. Congress must continue to propose regulations that set forth position limits," said Stupak.
"I think this confirms what many of us have been concerned about. The American consumer has been danged on a string. We know now where that string leads. We also have a brain-dead regulator which has not been doing its job. Speculation repair clearly needs to be part of comprehensive energy legislation and I intend to make that point at the Senate's energy summit this Friday," Dorgan said.
Contact Nick Snow at firstname.lastname@example.org