In a surprise announcement, the Commodity Futures Trading Commission confirmed that since last December it has been investigating the trading of contracts for future deliveries of oil, commonly called futures contracts. “Although the commission ordinarily conducts enforcement investigations on a confidential basis, the commission is taking the extraordinary step of disclosing this investigation because of today’s unprecedented market conditions,” the statement said. “The specifics of the ongoing investigation remain confidential. All commission enforcement inquiries are focused on ensuring that the markets are properly policed for manipulation and abusive practices.”
The acknowledgement of the probe seemed to suggest that there might be some truth to rumors of market manipulation. Normally, probes are kept quiet to avoid damaging reputations if no wrongdoing is uncovered. And if speculators are running up oil prices, the next question becomes: By how much?
Former Federal Reserve Chairman Alan Greenspan has guessed, that speculators may add at least $10 to the price of a barrel of oil. Other analysts have put the figure as high as $20. A barrel of crude oil contains 42 gallons of oil, but a $1 rise in per-barrel costs doesn’t translate to an equal increase in the cost of gasoline. According to the American Petroleum Institute, crude oil costs about $1.09 more per gallon since Jan. 1, while gasoline has risen about 70 cents a gallon.
It’s hard to say how much speculation may have contributed to higher energy prices, because growing global demand for energy and shrinking oil production have prompted fears of supply disruptions. Traders factor a so-called risk premium into the price. The unusual CFTC announcement followed several congressional hearings, the latest on May 20, where a prominent hedge fund manager testified that speculators in commodities markets are running up the price that ordinary Americans pay for gasoline and food.
“You have asked the question, ‘Are institutional investors contributing to food and energy price inflation?” And my unequivocal answer is ‘YES,’” Michael Masters, a portfolio manager for Masters Capital Management, said in prepared testimony. Masters runs a hedge fund that invests pools of money on behalf of wealthy investors, and he told senators that the prices of most major commodities such as wheat, corn and oil have doubled and in some cases tripled over the past five years while supplies of them are adequate. The reason, he said, “is a demand shock coming from a new category of participant in the commodities futures markets: institutional investors.”
Commodities markets have always attracted speculators, who try to make fortunes by betting on the shifting prices of everything from pork bellies to oil. But today’s commodities markets are flooded with money from deep-pocketed investors such as corporate and government pension funds, university endowments and foreign-owned investment vehicles called sovereign wealth funds. (Spokesman Review, Washington)
