Finally, some efforts to rein in speculators

The genie is out of the bottle but apparently powerless to answer any wishes. The US Commodity Futures Trading Commission (CFTC) has finally issued its proposals for new rules that “would limit big traders’ speculative positions in energy futures”, a desire of many governments and market participants since speculation was blamed for the surges in energy and food prices in 2008.

In the years since 2004 and right up to July 2008, oil prices have been volatile, but persistently on the rise without much support from the fundamentals of supply and demand. The average price in 2004 of the Opec basket was $36.05 a barrel and increased to well over $140 in July 2008 before it crashed to around $38 by the end of that year.

It is true that the period witnessed substantial growth in demand especially from developing countries and more so from China and India, but this increase has been amply met by increasing supplies from producers around the world and Opec producers in particular to the extent that world inventories continued rising or stayed at very comfortable levels. Yet the activities in the futures market continued to drive oil prices to unprecedented levels.

When oil futures became part of the New York Mercantile Exchange (Nymex) in the mid 1980s, the Exchange selected West Texas Intermediate (WTI) as the crude to be traded which made it a substantial marker later on to price a lot of oils around the world. At that time WTI production was about 1.5 million barrels per day (mbd) and the traded volume reached 10 mbd which was thought to be adequately proportional to world demand of almost 60 mbd.

Gulf News