Sunday, September 14, 2008

Innocent! Speculators were driving the price down!

Wrong again...the Court of Public Opinion and Ignorant Politicians wrong!

This is what we get for not teaching economics and business in our grammar and high schools.

In one of the broadest and most authoritative studies to date, the Commodity Futures Trading Commission has offered hard statistical data that financial trading hasn't been driving price moves. The CFTC conducted an unprecedented Wall Street data sweep and scrutinized millions of transactions worth billions of dollars between January and June of this year.
Commodity futures markets have grown fivefold by volume over the last decade, while becoming more complex. "Index traders" are one cause. These pension funds and other institutional investors don't buy options for commercial use, but rather roll them over from month to month as passive long-term investments. "Swap dealers," usually investment banks, operate off the main exchanges and sell customized futures packages to firms. These aggregations of options and derivatives are designed to match particular needs and spread risk more broadly.
Lo and behold, the CFTC found that index traders and swap dealers actuallyreduced their stake in crude oil futures as prices spiked. The number of contracts held by these investors betting that prices would increase -- the net long position -- fell by 11%, and more were shorting oil than going long over the six-month period. In other words, index traders and swap dealers were driving the future price of oil down.
Commodity index funds also have a much smaller share of the oil market than everyone thought: just 13%. Even if the figure was 70% or more, as some assumed, it wouldn't have mattered. In a futures exchange, trades are matched, so one trader's gain is another's loss. The overall volume is irrelevant.  MORE....


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