Given how much attention has been paid to the idea that evil speculators are behind the spike in oil prices, I can understand that the CFTC has to appear as if it is attempting to discipline traders. Otherwise, it will risk the suffering the same fate as Fannie and Freddie's soon-to-be former regulator OFHEO. Unless the CFTC gets its act together and starts disciplining the speculator community, Congress with make up a new regulator and replace the CFTC. So the CFTC pointed its finger at Optiver and its measly $1 million in trading profits.
Maybe a little simple math will help explain how ludicrous it is that the CFTC chose to go after these pea shooters first. Crude oil futures trade on the Nymex. One futures contract is equal to 1,000 barrels of oil. Therefore, if you own 1,000 futures, if the price of oil goes up $1, you make $1 million. So far today, according to the Nymex website, nearly 51,000 of the September crude oil futures contracts (the current front month) have traded. The open interest on the September contract is 316,031 contracts. The total notional amount of the 51,000 contracts that have traded today, using $123.86 as the price of oil, is $6.3 BILLION. The notional amount of the open interest is $39 BILLION. Hypothetically speaking, if you bought all 51,000 of the contracts that traded today, with crude oil down $1.63, you would be looking at losses of $81 million. Frankly, given the size of the market, I don't understand how anyone could or would attempt to manipulate oil prices to make a measly $1 million.
The Wall Street Journal has quotes from two congressmen applauding the CFTC's action as some sort of useful measure in clamping down on manipulators. The irony is that according to the complaint, the traders are accused of "banging the close" or trying to force the price down in the last seconds of trading. The traders were quoted with saying things like "just whack the oil." Congress has been beating the drum about manipulators forcing prices higher and the first case the CFTC brings is about traders attempting to manipulate prices to do down? Perhaps the two congressmen quoted in the Commodities Report section of the Wall Street Journal didn't actually read the allegations before applauding the action.
A far more interesting story would be to attempt to figure out what happened at SemGroup. SemGroup declared bankruptcy on Tuesday after posting $3.2 billion in oil trading losses. The company was short oil futures as a hedge against its physical assets. Speculation is mounting that the liquidation of its oil futures positions may have led to some of the recent volatility in oil prices. Here we're talking about billions of dollars in losses taken by a firm that was only trying to hedge its oil production. Maybe something fishy was going on here? If I were the CFTC, I'd focus on the billions in losses rather than the $1 million in profit. Why? Because if there really is manipulation going on in the oil markets, the manipulators reading the headlines think this is funniest joke they've heard in a long time.
4 comments:
Hey Sarah, Dan Brady here.
I have been trying to understand a fundamental issue for awhile and would like to get your perspective.
I dont' understand how the refiners can be so depressed. They are in a business with high (infinite--no new refineries in 20 years) barriers to entry, and their product has highly inelastic demand. I can understand that their margins can be volatile and in fact go negative for a time due to input cost and crack spreads. But dont they have to stabilize in a positive range??? Unless these guys (VLO, TSO, HES) have untenable debt levels it seems like they should have a very profitable business at the end of the day.
Dan,
If I knew the real answer to your question, I'd be much richer, believe me. I'm am certainly no expert and I believe even experts are completely perplexed at this anomaly.
I will defer to the closest thing to an expert I know. Comments to follow...
it's more confusing than why people thought paying $19 for WB was a good idea two days ago. or why you can still fly LA-NY for $400. i don't have any good explanation for it.
i do know that refineries have high fixed costs, so they are incented to keep operating (as opposed to shutting in production). moreover, most US refineries are configured for gasoline instead of distillates (which i mention because heat oil cracks are very juicy). lastly, storage inventories are very high, and the demand, while somewhat inelastic, has sagged enough that inventories have continued to build. even with all this, though, it seems like once the inventories start to flush through, refiners will benefit tremendously.
kinda sounds like i'm talking about the housing market and homebuilders!
and i hope i'm not the expert you were talking about, because if i'm the expert, we're all doomed.
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