Posted on 05/10/2008 9:27:45 PM PDT by DeaconBenjamin
TOKYO —
Japan will strengthen monitoring of speculative money in cooperation with the International Energy Agency based on the recognition that the movement of money from hedge funds contributes to escalating crude oil prices, government sources said Saturday, in accordance with the outline of the government’s annual white paper on energy for fiscal 2007. The Japanese government also plans to take up the issue of speculative money in crude oil markets at the upcoming Group of Eight summit in Hokkaido in July, the sources said.
The government wants to improve statistics about crude oil trading by cooperating with the IEA to help curb speculative transactions, the sources. The government will seek to exchange information with major financial institutions and expand data on each country’s oil production and its stock status to make the markets more transparent, they said.
LOL at any attempt to regulate speculation by hedge funds. I don’t there’s anything anyone can do to stop it, and any attempt will only drive hedge funds offshore.
However, I overheard someone on talk radio last week who claimed that while speculators in other markets had to put up 50% when bidding on futures, they were only required to post 5% when bidding on oil futures?
Does anyone know if this is true or not? If so, this would appear to be a good reason why so many are willing to speculate on oil futures and apparently being one of the causations of increased prices, while taking very little risk.
I am not sure about the requirements for funds to back up the investment, but the reduced risk issue is a misstatement. Regardless of how much you out up to back the contract, you are still responsible for full losses should the price fall, even if the fall is greater than your investment.
The issue in your example would not be the risk involved but the lower barrier to entry from the lower backing requirement. Normally lower barriers to entry bring prices down, but when all of those taking advantage of these barriers are speculators gambling on a price increase, the opposite is true.
That’s about right. The margin requirement is low. If it were increased to 50% or 100% (eliminated), it wouldn’t eliminate speculation but would cut perhaps $20 from the current price per bbl.
There are fairly low margin requirements, though I'm not aware that defaulting is a significant problem (and if it were I think the futures markets would take care of that themselves by increasing marger requirements or demanding other guarantees).
But more broadly, people here seem very willing to blame speculators for higher oil prices, without recognizing the potential benefits of such speculation.
Say, based purely on production and consumption numbers, oil would sell at $50/barrel now, but speculators rationally believe that five years from now prices will increase to $150 (say, becasue production in some current oilfields will decline or demand from places like China will increase). They can buy futures now, driving up the current market price of oil to be delivered five years from now; arbitragers (perhaps the same firms) will see this difference and buy short-term futures while selling long-term futures, sending the five-year price down a little but current prices up. The net effect is to increase prices now above what pure consumption and production would dictate in anticipation of a tighter situation several years out.
But is this really a bad thing? It seems like speculators have made oil cost more, but what this will do is drive down consumption today somewhat increasing the supply five years from now, and keeping prices from quite reaching the $150 point they otherwise would have. Ultimately, the speculators (if they prove correct--and ones who are not will be driven out of business) limit long-term price fluctuations by ensuring that current market prices reflect not just current production and consumption but long-term supply and demand estimates.
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