Senate, House members pledge action following independent oil speculation study

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 nicks@pennwell.com

Related Articles

California Bay Area advances plan for enhanced refinery regulations

12/19/2014 California’s Bay Area Air Quality Management District (BAAQMD), the public agency responsible for regulating stationary sources of air pollution in...

IOC wraps study for petrochemical plant at Paradip

12/18/2014 Indian Oil Corp. Ltd. (IOC) has completed a detailed feasibility study for setting up a polypropylene (PP) plant as part of a proposed petrochemica...

Patel appointed as LyondellBasell’s chief executive officer

12/18/2014 LyondellBasell has chosen Bhavesh V. Patel to serve as its chief executive officer effective Jan. 12, 2015. He succeeds James L. Gallogly, who...

Construction under way for Texas ethane cracker

12/17/2014 Ingleside Ethylene LLC, a 50-50 joint venture of Occidental Chemical Corp. (OxyChem) and Mexichem SAB de CV (Mexichem), has started construction on...

Cooper to buy 50% of offshore Gippsland Sole gas field

12/17/2014 Cooper Energy Ltd., Adelaide, has bought a 50% interest in the offshore Gippsland Sole dry gas field in retention lease Vic/RL3 as well as 50% of t...

ExxonMobil lets contract for Antwerp refinery

12/17/2014 ExxonMobil Petroleum & Chemical BVBA has let an engineering, procurement, and construction contract to Fluor Corp. for a delayed coker to be in...

BPC report examines 40 possible options to reform RFS

12/16/2014 The Bipartisan Policy Center issued a report outlining 40 possible options for reforming the federal Renewable Fuels Standard in an effort to move ...

Turkish refinery secures Canadian financing

12/16/2014 Export Development Canada (EDC) said it is participating as lead arranger in the $3.3 billion debt-financing consortium supporting STAR Rafineri AS...

Angola’s Sonangol secures $2 billion loan for refinery, other projects

12/15/2014 China Development Bank (CDB) has extended a $2 billion line of credit to state-owned Sonangol EP to support expansion projects in Angola’s oil and ...

White Papers

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...

Accurate Thermo-Fluid Simulation in Real Time Environments

The crux of any task undertaken in System Level Thermo-Fluid Analysis is striking a balance between ti...

6 ways for Energy, Chemical and Oil and Gas Companies to Avert the Impending Workforce Crisis

As many as half of the skilled workers in energy, chemical and oil & gas industries are quickly he...
Sponsored by

AVEVA NET Accesses and Manages the Digital Asset

Global demand for new process plants, power plants and infrastructure is increasing steadily with the ...
Sponsored by

AVEVA’s Approach for the Digital Asset

To meet the requirements for leaner project execution and more efficient operations while transferring...
Sponsored by

Diversification - the technology aspects

In tough times, businesses seek to diversify into adjacent markets or to apply their skills and resour...
Sponsored by

Engineering & Design for Lean Construction

Modern marketing rhetoric claims that, in order to cut out expensive costs and reduce risks during the...
Sponsored by

Object Lessons - Why control of engineering design at the object level is essential for efficient project execution

Whatever the task, there is usually only one way to do it right and many more to do it wrong. In the c...
Sponsored by

Available Webcasts



The Future of US Refining

When Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Oil & Gas Journal’s Forecast & Review/Worldwide Pipeline Construction 2015

When Fri, Jan 30, 2015

The  Forecast & Review/Worldwide Pipeline Construction 2015 Webcast will address Oil & Gas Journal’s outlooks for the oil market and pipeline construction in a year of turbulence. Based on two annual special reports, the webcast will be presented by OGJ Editor Bob Tippee and OGJ Managing Editor-Technology Chris Smith.
The Forecast & Review portion of the webcast will identify forces underlying the collapse in crude oil prices and assess prospects for changes essential to recovery—all in the context of geopolitical pressures buffeting the market.

register:WEBCAST



On Demand

Optimizing your asset management practices to mitigate the effects of a down market

Thu, Dec 11, 2014

The oil and gas market is in constant flux, and as the price of BOE (Barrel of Oil Equivalent) goes down it is increasingly important to optimize your asset management strategy to stay afloat.  Attend this webinar to learn how developing a solid asset management plan can help your company mitigate costs in any market.

register:WEBCAST


Parylene Conformal Coatings for the Oil & Gas Industry

Thu, Nov 20, 2014

In this concise 30-minute webinar, participants have an opportunity to learn more about how Parylene coatings are applied, their features, and the value they add to devices and components.

register:WEBCAST


Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected