In October 2007, the author of this piece, Ann Davis, had a story that knocked our socks off: "Where Has All The Oil Gone?"
From the Wall Street Journal:
...Still, even some Wall Street analysts whose firms benefit from the status quo contend that the investment influx has changed market dynamics and could be making raw-materials prices higher or more volatile.
"We are seeing the classic ingredients of an asset bubble," says Edward Morse, chief energy economist at Lehman Brothers. He says that for every $100 million in new investment since 2006, oil prices have risen 1.6%.
Plaguing both sides of this debate is a shortage of data about a thriving sector of the market: the customized market for derivatives known as swaps. Wall Street banks such as Morgan Stanley and Goldman Sachs have developed swaps to allow pension funds, hedge-fund traders and commodity companies to bet on prices among themselves, largely outside the regulatory surveillance of the CFTC.
Investors can make larger trades through swaps dealers than they could make directly on a futures exchange. Until this month, the CFTC has not required Wall Street swaps dealers to routinely provide more detail on who these customers are....
...Swaps have grown so popular that they are the primary means by which institutional investors have made massive bullish bets since 2002, totaling an estimated $260 billion in indexes linked to the price of a basket of commodities. At a hearing in early June, the CFTC said 85% of index investing is done outside of regulated futures exchanges.
The Bank for International Settlements, a global body that surveys central banks, puts the notional value of all over-the-counter commodity instruments at $9 trillion.
Because an estimated 50% or more of this market consists of instruments related to crude oil, a report from research company ISI Group says over-the-counter oil trading could be as much as 18½ times larger than the total oil bets outstanding on the main regulated energy-futures market, the New York Mercantile Exchange....
...But congressional witnesses, among others, say that the CFTC misses trends involving large trades by swaps dealers acting on behalf of index investors and hedge funds because it lumps what little data it gets from Wall Street swaps dealers into a "commercial trader" category also encompassing airlines and oil refiners.
A CFTC study released last year showed that while commercial traders as a whole are net sellers, swaps dealers were typically net buyers of the near-term futures contracts that are quoted as the Nymex benchmark....
In late May I had a comment back-and-forth at the WSJ's MarketBeat blog, reading it again, it is apparent that the other commenter and I were talking past each other, kind of a grade school/grad school kind of thing:
Comment by - May 31, 2008 at 8:43 pm
How many times do we have to endure this sort of conspiratorial idiocy in human history before it stops?!! How is it that so many people cannot see past their well-documented, primitive anti-market biases? If prices rise, blame the speculators! Of course, it’s so obvious! Those evil capitalists! This time, the twist is that it’s not just the evil oil companies and traders that are manipulating prices, it’s the pension and endowment funds!
Liberal environmentalists (like Climateer) are so fond of touting the supposed “consensus” of scientists that support their anti capitalistic bludgeon of anthropogenic global warming (despite the fact that many reputable climate scientists don’t support it), so it’s funny that on this issue not one reputable, trained economic scientist has supported this ridiculous witch hunt against commodity index investors. Funny too how no one, including Mr. Masters, has supplied anything other than naïve speculation that what he claims is true. In fact, all reputable economists who have opined on this notion dispute it....
Comment by - June 4, 2008 at 12:02 pm
This is like arguing with a parrot or a sugared-up kid with ADD. I could no doubt spend weeks countering one error of yours after another — such as explaining to you the difference between the initiation of force and a legitimate response to its initiation by a criminal; or how attempts by governments’ to control markets will always lead to unintended consequences and loss of efficiency, as it did in California’s energy markets, and with things like position limits in commodities markets (just ask a trained economist, who will likely agree that if position limits make any sense at all, they certainly make no sense for index investors like CalPERS who continuously roll their positions forward and clearly have no intent to corner any commodity market) — but then I don’t have that much time or interest....
There's more, if you care, here.