I am as unhappy about the high price of gasoline as the next guy. Pundits, politicos and politico-wanna-bes are blaming Speculators, Wall Street, Banks & OPEC for what is being labeled as “market manipulation”. Bowing to political pressure, the administration is calling on the CFTC (Commodity Futures Trading Commission) to investigate the futures market to find which entity is behind this market activity.
Now I do feel there is market manipulation occurring, but I don’t think it is coming solely from trading of products listed on an exchange. alone and as I mentioned above, there are many variables involved in setting the market price.
A review of CFTC and exchange data refutes some of the myths currently circulating about excessive speculation.
The CFTC “Bank Participation in Futures Markets” shows that on 01.04.11 the open interest for the NYMEX RBOB contract stood at 270,115 contracts. Six banks had positions on that date. The banks had 5,238 long positions and 2,363 shorts, which nets out to 2,875 longs or 1.0% of the open interest. Bank Holding on 01.04.11
On 05.03.11 the NYMEX RBOB contract had an open interest of 301,213 contracts. There were seven banks holding open futures positions on that date. The banks held 6,291 longs versus 3,658 shorts, leaving the banks long 2,633 contracts which is less than 1.0% of open trades. I don’t think positions of this magnitude would influence prices at all.
The CFTC produces another report that monitors activity in commodity indices. These indexes were created for investors who want protection from rising prices. The CFTC gathers position data for the individual components of the indexes. I reviewed the month-end RBOB (gasoline) positions from 12.31.10 through 03.31.11. You can see from the enclosed spread-sheet that at year-end the price was $2.4576 and indexes were net long the equivalent of 81,000 contracts having a notional value of $8.2 billion. On 03.31.11, although index RBOB positions were unchanged at 81,000 contracts but there had been a 33.3% rise in the price of gasoline.
Index RBOB Positions
Index RBOB Positions
The CFTC Commitments of Traders Report (COT) is probably the most widely followed position report the commission produces. It looks at the open positions at the close of business Tuesday and is released Friday afternoon. The COT classifies the different types of traders (commercials/hedgers, SWAP traders, fund managers and retail investors) and tracks their holdings. Again I looked at the weekly data from 01.04.11 through 05.03.11. On 01.04.11 commercial hedgers were short 117,363 and all other categories were long. The RBOB price was $2.3082. On 05.03.11 the price was $3.0145 and commercial were short 103,352 contracts. (Meaning they bought 14,011 contracts) Of the four other categories, the retail investors added a total of 300 to their longs (bought), 2 had sold to reduce their long positions and one category had sold to become net short.
In this case, the price increased over 30% as industry insiders were buyers.
During my review of supply and production figures from the Energy Information Administration (EIA.gov) I came across some interesting charts:
#1 Crude supplies: Above average
#2 North American production has increased to levels not seen in over 5 year
#3 Demand is at 09 levels
(You would think that these 3 factors would keep a lid on prices)
#4 Refinery activity is below normal for this time of year
#5 Gasoline supplies:
Below average Note PADD #1 supplies. The NYMEX RBOB is priced off of rack prices at this delivery point.
I enjoy a good conspiracy from time to time, and sometimes even create one of my own.* Reviewing this data I couldn’t see any trading related “smoking gun’, but the oil industry actions seemed to be stoking the price rally. Yes, speculators and index funds are of the buy-side, which supports prices, but these positions remained fairly static, so there has been no new buying to cause a price increase. Banks have been minor players in the futures markets, so there is no way that they could be gaming the market. But a bell went off when I looked at the historical COT reports.
Over the past 5 months, speculators have been reducing their long holdings and, in one case, going short the market. The only buy-side activity comes from “commercial interests.”
On the fundamental side, why, with oil supplies at relatively high levels and US oil production increasing, is refinery utilization at such a low level. With gasoline inventories running below average, you would think that oil processors like Exxon, Chevron, Conoco & Koch Industries would ramp up refinery operations… OH Silly me, what I am I thinking, Econ 101, increasing supplies would lower the price for gasoline. Lower prices would mean reduced earning, which would hurt the company’s stock price, which means lower bonuses.
Also, I am sure that the “oil industry” is quite unhappy with the current administration’s efforts to 1) eliminate oil tax breaks 2) reform and modernize the Mineral Management Department to better monitor the royalties due the government from the leases and production of natural resources from Federal land and off-shore, and 3) limiting deep water oil exploration and production due to environmental concerns. And too, firms like Halliburton and Koch Industries, besides being in the oil industry, have a strong aversion to President Obama and would like nothing more than a Republican President in the next election.
UPDATE*
The oil industry scored a victory of sorts on Friday, May 14th when Pre. Obama announced plans to increase domestic oil production.
These include:
Directing the Department of the Interior to conduct annual lease sales in Alaska
-Creating a new interagency group to streamline Alaska
-Expediting evaluations of oil and gas in the mid- and south-Atlantic.
-Extending leases in Gulf of Mexico areas affected by last year's temporary moratorium after the BP oil spill.
Read more: http://www.miamiherald.com/2011/05/14/2217146/faced-with-high-prices-at-pump.html#ixzz1MOMNY1Lc
