Foreign Policy Blogs

Speculation about commodity speculation

In a lightly publicized event over the weekend, a trader in London at PVM Oil Futures, the largest oil trading firm, made “unauthorized” purchases of oil contracts at 2 am. The trades pushed the price of Brent crude up to $73.50/bbl on Tuesday, the highest price this year, before dropping to $66 by the end of the week. The episode highlights the role that traders may play in affecting prices.

The incident comes at a time where many analysts, such as Deutsche Bank and well, me, believe that oil prices are divorced from basic supply and demand factors. If oil remains near $65 a barrel in a weak economic environment, and analysts have trouble ascertaining why, such stories and follow-up investigations into the role that energy traders play will likely become bigger press events.

The oil market is very complex (read: opaque). Its dominated by traders and very large companies, often state-owned. Other commodity markets, such as wheat and rice, also share some similar characteristics. When prices remain unexplainably high, conspiracies – some of them true – take hold and consumers will push for government action.

Today, the Commodity Futures Trading Commission (CFTC), the regulator of commodity markets in the US, is set to propose regulations aimed at curbing speculation by requiring firms to report their holdings and limiting the amount firms may invest in certain markets. Their goal is to reduce volatility and the influence of individual firms in controlling commodity prices. Although CFTC’s actions may curb the action of some US firms, it is just the start of the debate.

 

Author

David Abraham

David S Abraham has expertise in the analysis of geopolitical and economic risk as well in energy issues. At the White House Office of Management and Budget, his work included overseeing natural resource and foreign assistance programs, and serving on the interagency trade policy committee. In his previous role as a sovereign risk analyst with Lehman Brothers, subsequently, Barclays Capital, he advised the firm on geopolitical and economic risks in developing countries. He has also consulted for a variety of organizations including the United Nations Support Facility for Indonesian Recovery, RBS Sempra Commodities, ClearWater Initiative and a small German consultancy. David earned degrees from Boston College and The Fletcher School at Tufts University and proudly served as a Peace Corps Volunteer. His written work has appeared in a variety of publications, most recently in The New York Times, The Providence Journal, and CFR.org. He speaks Lithuanian and is a Term Member at the Council on Foreign Relations.

Area of Focus
Geopolitics; Economic Risk; Energy Issues

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