Saturday, May 31, 2008

UPDATE: The CFTC, Commodity Speculators and Mom

Mom's crabby today.
She wanted to know why her favorite doughnuts are priced 50% higher than they were at this time last year.
I started to tell her about the effects of higher energy prices on every step of the food production and delivery chain. Professor Runge's estimate* that one-third of the increase in corn prices is the result of mandated production of ethanol. The Pacific Decadal Oscillation. Demand from China.
She hung up on me.
Then she called back and said "Write it down"

Back in August we had a short post "Manipulation of Oil Markets" which mentioned Cushing, Oklahoma.

In October, Anne Davis of the Wall Street Journal, wrote one of the best pieces of investigative/expository journalism on the oil biz that I've ever seen "Where Has All The Oil Gone?":
...The reasons Cushing's crude has been disappearing are surprisingly complex, and shed light on the growing involvement of speculators in the global oil market....

In November we lifted a piece from Knowledge@Warton
The Inventory Code: New Ways Investors Can Cash In on Volatile Commodities"

On Thursday, May 20 Michael Masters testified before the Senate Homeland Security and Governmental Affairs Committee. The blogosphere lit up.
Interfluidity an interesting post:

Michael Masters' testimony regarding the role of speculation in commodity prices has drawn a lot of comment since last week. [See, for example, Cassandra, James Hamilton, Tim Iacono, John Mauldin, Michael Shedlock, Yves Smith.] According to Masters', portfolio investors' increasing participation in commodities via futures markets has been driving a speculative price boom, over a period of years.

I have to say, I am very skeptical of Masters' view....
We had five posts, including three in one day:

A Different Take on Speculators and Oil
John Authers: Speculators & Oil Price Spikes
Oil Bubble? The Debate Rages
Commodity Prices: Hedge Fund says it's University Endowments and Pension Funds
Oil Prices: Are Pension Funds Fueling High Oil Prices

Yesterday Naked Capitalism, in a post that you should read, "CFTC Investigation of Oil Trading Focuses on Tankers, Storage" said:

As we noted in an earlier post, citing an article by John Dizard in the Financial Times:
You don't have to buy the evil-specs-caused-all-this argument to believe there are problems with the way parts of the commodities markets work. As Mr [Eugen] Weinberg [at Commerzbank] points out: "The West Texas Intermediate oil contract, based on delivery in Cushing, Oklahoma, is good for 300,000-400,000 barrels per day. The storage capacity in Cushing is about 20.5m barrels. The trading volume on which that is based is between 500m and 600m barrels per day. If you are going to manipulate the price, you would think about doing that in Cushing."

It is worth your time, as is this overview from the NYT's DealBook:

A couple tidbits from Reuters in:
U.S. oil probe focusing on price manipulation: report

Mom, we'll have something on intermarket analysis Monday morning.

*What Proportion of Food Price Increases is Attributable to Ethanol?