Fabbs
12-21-2010, 01:07 AM
http://www.kansascity.com/2010/12/20/2534047/energy-trading-seems-to-be-fueling.html
Energy trading seems to be fueling the rise in gasoline prices
By STEVE EVERLY
The Kansas City Star
More News
Gasoline prices are near a record for this time of year despite healthy supplies, and some analysts are saying heavy speculation in the energy markets is helping cause the higher prices.
Federal regulators have been working on regulations that could curb that speculation, but now those new rules have been put on hold.
Gasoline is averaging $2.98 a gallon nationally, up from $2.59 a year ago and nearing the December record of $2.99 set in 2007. But petroleum and gasoline supplies continue to be above normal as the economy struggles to recover from the recession.
“I am surprised,” said Mike Right, a spokesman for AAA in Missouri. “Obviously there are things doing this that have nothing to do with supply and demand.”
One thing that has recovered is buying in the energy futures markets, which is approaching its pre-recession peak. The growth of such energy trading — including substantial action by banks and other big financial firms — was blamed for part of the record run-up of gasoline and diesel prices two years ago.
Since then, regulators have been studying that trading, and last week the U.S. Commodity Futures Trading Commission appeared ready to move ahead with regulations to limit the amount of commodity futures the big financial players could buy.
But Gary Gensler, the commission’s chairman and a supporter of the regulations, unexpectedly adjourned Thursday’s meeting that was supposed to vote on the next step in the process, which is allowing public comments on the proposal.
Instead, Gensler said, the regulations needed “to ripen a little bit more” — a sign that he didn’t have the votes on his commission to eventually approve the curbs.
The failure to vote dismayed supporters of the limits, who include big fuel consumers such as airlines and public-interest groups representing everyday motorists.
“They’re basically deadlocked at the commission,” said Tyson Slocum, director of the energy program at Public Citizen, a public interest group in Washington. “It underscores the fact that banks continue to be in a powerful position.”
The futures markets — in which contracts are bought and sold for the future delivery of a commodity such as oil — allow companies that actually produce and use such products to lock in prices. For them, the contracts provide a form of price insurance and allow them to hedge against future price changes.
But speculators also can play those markets, betting on price swings by buying and selling the contracts but never actually producing or taking possession of the commodities involved.
Big financial firms, wanting simply to invest in oil and other commodities, have greatly increased their buying in the futures markets in recent years. They also have packaged those contracts into so-called index funds and sold them to other investors, such as the Missouri State Employees’ Retirement System.
But all that buying can help push prices up for oil and other commodities.
Many forces influence energy prices, so it’s difficult to pinpoint how much effect any one factor has. A weak dollar also tends to drive up oil prices, for example, and The Kansas City Star recently reported that the U.S. was exporting record amounts of refined products, such as gasoline and diesel, which also pushes up prices.
But some energy market analysts, such as economist James Williams of WTRG Economics, have been looking at the influence of the futures markets.
Williams said there was a time when analysts could look at an indicator such as the number of days that petroleum supplies would meet demand and have a good idea where prices would go. But he said that with the rise of futures trading, which more than tripled leading up to the 2008 energy price surge, that’s no longer the case.
Williams can’t say just how much the futures trading alone is pushing up prices. But he estimates that based just on supply and demand, oil prices would be about $20 a barrel lower than they are now. That would amount to $400 million in daily savings on petroleum products in the U.S., and gasoline prices that would be lower by roughly 40 cents a gallon.
“It’s absolutely right that in the absence of the index funds that fuel prices would be lower,” he said.
Concerns about the 2008 run-up in energy prices, and the role the big firms’ futures trading played in it, were reflected in the financial market reform legislation passed by Congress and signed into law by President Barack Obama earlier this year. One provision gave the Commodity Futures Trading Commission the ability to regulate the big firms’ commodity futures trading — something energy users such as the airlines favored.
But the proposed trading regulations have been opposed by investment banks, by trade groups representing them and by the CME Group, which owns the New York Mercantile Exchange, where commodity futures are traded.
Some commissioners said further study was needed, although Gensler, the chairman, continued to voice his support for the proposed regulations.
Limits on big institutional trading “help to protect the markets both in times of clear skies and where there is a storm on the horizon,” he said in a statement.
But for now at least, as gas prices approach $3, any such limits are on hold.
To reach Steve Everly, call 816-234-4455 or send e-mail to [email protected].
Energy trading seems to be fueling the rise in gasoline prices
By STEVE EVERLY
The Kansas City Star
More News
Gasoline prices are near a record for this time of year despite healthy supplies, and some analysts are saying heavy speculation in the energy markets is helping cause the higher prices.
Federal regulators have been working on regulations that could curb that speculation, but now those new rules have been put on hold.
Gasoline is averaging $2.98 a gallon nationally, up from $2.59 a year ago and nearing the December record of $2.99 set in 2007. But petroleum and gasoline supplies continue to be above normal as the economy struggles to recover from the recession.
“I am surprised,” said Mike Right, a spokesman for AAA in Missouri. “Obviously there are things doing this that have nothing to do with supply and demand.”
One thing that has recovered is buying in the energy futures markets, which is approaching its pre-recession peak. The growth of such energy trading — including substantial action by banks and other big financial firms — was blamed for part of the record run-up of gasoline and diesel prices two years ago.
Since then, regulators have been studying that trading, and last week the U.S. Commodity Futures Trading Commission appeared ready to move ahead with regulations to limit the amount of commodity futures the big financial players could buy.
But Gary Gensler, the commission’s chairman and a supporter of the regulations, unexpectedly adjourned Thursday’s meeting that was supposed to vote on the next step in the process, which is allowing public comments on the proposal.
Instead, Gensler said, the regulations needed “to ripen a little bit more” — a sign that he didn’t have the votes on his commission to eventually approve the curbs.
The failure to vote dismayed supporters of the limits, who include big fuel consumers such as airlines and public-interest groups representing everyday motorists.
“They’re basically deadlocked at the commission,” said Tyson Slocum, director of the energy program at Public Citizen, a public interest group in Washington. “It underscores the fact that banks continue to be in a powerful position.”
The futures markets — in which contracts are bought and sold for the future delivery of a commodity such as oil — allow companies that actually produce and use such products to lock in prices. For them, the contracts provide a form of price insurance and allow them to hedge against future price changes.
But speculators also can play those markets, betting on price swings by buying and selling the contracts but never actually producing or taking possession of the commodities involved.
Big financial firms, wanting simply to invest in oil and other commodities, have greatly increased their buying in the futures markets in recent years. They also have packaged those contracts into so-called index funds and sold them to other investors, such as the Missouri State Employees’ Retirement System.
But all that buying can help push prices up for oil and other commodities.
Many forces influence energy prices, so it’s difficult to pinpoint how much effect any one factor has. A weak dollar also tends to drive up oil prices, for example, and The Kansas City Star recently reported that the U.S. was exporting record amounts of refined products, such as gasoline and diesel, which also pushes up prices.
But some energy market analysts, such as economist James Williams of WTRG Economics, have been looking at the influence of the futures markets.
Williams said there was a time when analysts could look at an indicator such as the number of days that petroleum supplies would meet demand and have a good idea where prices would go. But he said that with the rise of futures trading, which more than tripled leading up to the 2008 energy price surge, that’s no longer the case.
Williams can’t say just how much the futures trading alone is pushing up prices. But he estimates that based just on supply and demand, oil prices would be about $20 a barrel lower than they are now. That would amount to $400 million in daily savings on petroleum products in the U.S., and gasoline prices that would be lower by roughly 40 cents a gallon.
“It’s absolutely right that in the absence of the index funds that fuel prices would be lower,” he said.
Concerns about the 2008 run-up in energy prices, and the role the big firms’ futures trading played in it, were reflected in the financial market reform legislation passed by Congress and signed into law by President Barack Obama earlier this year. One provision gave the Commodity Futures Trading Commission the ability to regulate the big firms’ commodity futures trading — something energy users such as the airlines favored.
But the proposed trading regulations have been opposed by investment banks, by trade groups representing them and by the CME Group, which owns the New York Mercantile Exchange, where commodity futures are traded.
Some commissioners said further study was needed, although Gensler, the chairman, continued to voice his support for the proposed regulations.
Limits on big institutional trading “help to protect the markets both in times of clear skies and where there is a storm on the horizon,” he said in a statement.
But for now at least, as gas prices approach $3, any such limits are on hold.
To reach Steve Everly, call 816-234-4455 or send e-mail to [email protected].