Wednesday, July 29, 2009

CFTC: Speculators Caused Oil Price Spike Last Summer

The Commodity Futures Trading Commission (CFTC) will issue a report in August that points to speculators as playing a significant role in driving up oil prices last year. Even though last year the CFTC said oil-price swings came primarily from swings in supply and demand. Financial investors (sepculators) bet on the direction of commodities prices by buying contracts tied to indexes. Due to the misguided assessment last year, CFTC will probaly adopt new rules to limit the amount of investments in commodities by big institutions betting on their direction purely for financial gain.

This speculation is usually normal on Wall Street, but the problem is that speculators should not make it more costly for consumers to access heating oil, gasoline, food and other essentials. Proponents of index speculation say these parties have added liquidity to markets. They blame price fluctuations on supply and demand and say attempts to regulate speculation are foolhardy and could drive investors to less-regulated venues. Investors may also buy derivatives, not directly traded on futures exchanges, that let them make contrary bets to offset their risks. Crude-oil prices surged in July 2008 to a record $145 a barrel, then dropped to about $33 in December. Oil now trades at around $68 a barrel. (WSJ, 7/28/09)

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