Tuesday, June 03, 2008

Congress Blames the Hedge Funds, Part III: A Fact You Won’t Read in the Washington Post Today

Hedge Funds Cut Oil Bets as Prices Rose, CFTC Probed

June 2 (Bloomberg) -- Hedge-fund managers and speculators reduced bets on higher oil prices by 80 percent since July as crude futures rose to records and U.S. regulators started investigating trading, government data show.

This didn’t make the Washington Post or the New York Times.

So-called speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27 from a record 127,491 on July 31, according to a U.S. Commodity Futures Trading Commission report on May 30.

It didn’t even make The Wall Street Journal, which carried a front page online article on the death of Bo Diddley last night, not that the CFTC report is more important than the death of Bo Diddley.

It’s just that The Wall Street Journal seems to be trying hard to become the New York Times, what with the nonstop Presidential campaign coverage, news from Myanmar and the Chinese earthquake, not to mention those expanded editorial pages, which seem like they take up most of the newspaper now.

And you can be sure that the geniuses in Congress aren’t reading Bloomberg. If they did, it might interfere with their strategy for dealing with rising energy costs, stagflation and global warming, which is, and we aren't making this up: “Blame-the-hedge-funds-and-get-reelected.”

The decline may complicate the CFTC's probe as regulators try to determine how much of the rise in oil to more than $135 a barrel last month was caused by speculators who may have manipulated the market instead of consumer demand. The CFTC, under pressure from Congress, said May 29 it was investigating the doubling of oil prices the past year and said it will consider giving more detail on the types of oil investors and their holdings.

Of course, they could give Henry Paulson a call.

Perhaps the one competent individual in the entire District of Columbia, Paulson isn’t buying the Congressional strategy. As the Bloomberg article reports:

“If you look at the facts, they show that the price of oil is about supply and demand,” Paulson told reporters traveling with him on May 30 on a plane to Jeddah, Saudi Arabia.

Don't expect anyone from Congress to be calling Hank Paulson for advice. Why would anyone want to “look at the facts”?

Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.


mxq said...


"non-commercial" entities have never really been the problem, and that's what BBG is reporting on.

The problem is that ~30% of "commercial" traders are companies like Morgan Stanley, GS (prime brokerage) and index funds. Now, have a look at this COT report that the CFTC now provides...specifically "index traders." There is obviously a hideous imbalance here. Notice that oil isn't even reported!

Its a problem of not delineating between bona fide "commercials" and "paper players."

In addition, we have no idea if those hedgefunds shifted that liquidated NYMEX capital to the ICE. As they don't have to report positions on this market. It is a completely unregulated market.

Even the most basic regulations that equity market adhere to (i.e. reporting outsized positions) aren't required by the ICE.

Amaranth, Enron, etc. were champions of this type of market.

Totally unacceptable.

Ashwin said...

when are we getting the netjets story?

mxq said...

My apologies on the above link...here is the correct address.


Troy Peterson said...

great followup mxq, you beat me to it....

Normally I'm on board with Mr. Matthews, but he apparently hasn't kept up with his reading on the Michael Masters piece that Congress is focused on.

Jeff Matthews said...

Read today's WSJ, gentlemen:

In written testimony to the U.S. Senate last month, Jeffrey Harris, chief economist of the Commodity Futures Trading Commission, said that while futures-contract prices for WTI have more than doubled during the past 14 months, managed-money positions, as a fraction of the overall market, have changed very little.

"Speculative position changes have not amplified crude-oil futures price changes," he wrote. "More specifically, the recent crude-oil price increases have occurred with no significant change in net speculative positions." He also said there was no evidence that position changes by speculators "precede price changes" for crude-oil-futures contracts.


mxq said...


The CFTC's data set is very limited...and that's one of the huge problems Congress is trying to address. For instance, Jeff Harris testified that they saw nothing in the way of manipulation in nat gas prior to the Amaranth Collapse nor did they see anything prior to BP's manipulation of propane.

(here's an archived story from Gretchen Morgenson)

The CFTC has little jurisdiction over the OTC markets...which is where the majority of the trading occurs. That's a big no-no. Its also no wonder that the ICE (an unregulated market) was a JV between BP, GS and MS.

All told, the CFTC is a huge liability (enabler?) right now.

Btw, Naked Capitalism had a good debate on this topic a few weeks back.

mxq said...

In addition, Mike Greenburger, fmr Director at the CFTC directly addresses this quote by Harris...start on page 15.

Richard said...


The problem is that commodity index players are causing commodity prices in general to rise. I previously posted the Masters testimony, but either you didn’t read it or didn’t understand it. Simply put, if a speculator buys an off-exchange commodity forward through a broker, it goes unreported, and the offsetting buy by the selling broker is counted as a commercial hedge. Those reported spec. positions by the CFTC are utterly meaningless. So you shouldn’t be reading it in the Washington Post because the information is B.S.

Futures have a direct effect on the price of the physical commodity. Perhaps this will help. If an investor buys $5 billion of stock index futures, surely you understand the effect of that trade; the price of stocks goes up because the futures seller needs to buy the underlying stock to hedge their short exposure. The same thing is going on in commodities. Futures trades inevitably affect the physical market.

Commodities today are one of the rare instances where there is a real moral question in investing; Is it moral to jack up the price of food which the poor must buy to live, in order to profit? It’s likely that the state pension funds allocating money to commodities were too dumb to ask the question. As prices rise, and food riots in Haiti and other places cause governments to fall, they will learn. The CFTC appears incapable of seeing this as an issue, and it is right that Congress should be concerned.

Jeff Matthews said...

Richard: Thank you for explaining futures. I get the linkage. I just think it's wrong.

1.3 billion Chinese raising their standard of living has mightily influenced commodity pricing, from rice to oil to copper to zinc, moreso than futures buying.

Speculation is a sympton, not a cause. The fundamental problem is we use more oil than we produce. Copper too. Potash, urea also.

Still, I'll take the under on oil demand in six months. A few more airline bankruptcies, and the massive shift away from gas guzzlers to small cars in the U.S., as well as the lifting of refined product subsidies in Asia will likely bring supply and demand in balance, along with prices.

Not Congressional hearings or limits on trading positions.


Ashwin said...

there are no moral implications to buying a commodity index

is there a consideration in shorting?

Ashwin said...

Does no one actually trade futures?

Billions of people coming online, from nations with a 30 percent savings rate (some would say a savings glut) going from 1200 calories a day to 2000 calories. Institutions should be long grain, rice and diabetes medication makers

Copper, potash, oil, coaking coal, do you really think the price increases in all these commodities are due to systemic manipulation?

mxq said...

"Not Congressional hearings or limits on trading positions."

So should we also halt congressional hearings about subprime mortgages and people losing their homes as a result?

Using that rationale, subprime mortgages could be labeled as symptomatic just as much as paper demand for commodities.

I guess the point is: if we're willing to fight wars over something, we should, at the very least, have the common sense to ensure proper regulation against the vagaries of trading a barrel of oil 100 times from well-head to burner.

Jeff Matthews said...

MXQ: What one has to do with the other is beyond me.

Nobody blamed the subprime mortgage problem on hedge funds, unless I missed those hearings, too.


mxq said...


"Nobody blamed the subprime mortgage problem on hedge funds, unless I missed those hearings, too."

You're exactly right. They blamed it on non-existent regulation; which is what we currently have in the futures/OTC commodity markets. And thats what they have in common.

Today MS increased their July oil forecast to $150bbl -- as if it were some price target on a nasdaq-traded, circa-1999 tech stock.

What's worse?

The market actually responds to this and oil is up almost $7.

I just don't see why XOM or Dubai could/should care a hoot about what MS says or thinks, as MS is about as far from the oil patch as they get.

So we can probably assume XOM, COP, Dubai, are not the ones bidding it up today (though, they have to delta hedge so, they might be contributing).

But, of course, we won't ever know b/c this market is about as regulated as the mortgage-lending industry, and the Henry Blodgets, and the positions at LTCM, and the writers of portfolio insurance of the financial world were...

Anonymous said...

Jeff: A couple of thoughts come to mind after reading your post (not that I disagree with either you or Henry Paulson, but trading derivative contracts (i.e., oil futures) does, IMHO, spur "demand" for the actual physical commodity, even if the trades are only for price discovery and/or risk management)

A) The CFTC is scheduled to host a conference this month with other international market regulators on whether there's been manipulation recently by market participants in the energy derivatives markets. I don't think US Congressmen are the only ones thinking hedge funds are to blame for higher oil prices due to increasingly speculative trading activity.

B) Isn't it possible, Jeff, that there's a potential for manipulation of the oil futures market by traders when highly leveraged financial trades result in overall demand exceeding available supplies at the time futures contracts mature? Just wondering...think back to the different commodities that have been manipulated from the mid 1970's to the late 1990's (i.e., silver, soybeans, copper, etc.)

C) My two cents on curbing speculative trading activity is to simply raise the margin requirement. No new regulatory frameworks, no "jawboning" traders, just raise the margin and I'd bet speculative trading activity in oil futures would drop dramatically, but I could be wrong.