Energy Speculation – Derivatives Markets
The dramatic run-up in petroleum product prices, including gasoline and diesel, was the result of a confluence of factors. Some of these factors directly impact supply and demand. However, according to several experts, market fundamentals, including the increased demand from China and India, supply disruptions in Nigeria and Venezuela, and the declining value of the U.S. dollar do not fully explain the dramatic rise and fall of the price of oil last year. In addition to market fundamentals, there had been a significant increase in the amount of dollars invested in the petroleum derivatives market by non-commercial participants. This increased speculation may be partially responsible for the dramatic rapid increase in oil prices.
While ATA cannot quantify the extent to which speculation is responsible for the recent dramatic increase in the price of crude oil, we believe that excessive speculation is part of the problem. To address this problem, the federal government should increase the transparency of the derivatives markets and establish reasonable position limits for non-commercial traders.
Increasing market transparency and establishing reasonable aggregate position limits that distinguish between commercial and non-commercial participants have no potential downside that we can discern. Under a worst-case scenario, the transparency of the market is improved, but the price of oil remains unaffected. More optimistically, these remedies would reduce speculative bubbles, restore investor confidence in the futures markets, and limit the participation of asset accumulators in the futures markets strengthening the link between commodity prices and market fundamentals.