Two Factors That May Doom Commodity Bulls

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Attention all commodity traders: Have you heard the recent growing chorus of Congressmen in Washington blasting speculators in commodity markets? Crude oil's spike to a record high above $135 a barrel this week is the catalyst for the present commotion in the Beltway.

At a congressional hearing this week, a Commodity Futures Trading Commission (CFTC) official was grilled and lectured by legislators regarding the market speculators they blame for rising commodity prices, which have led to higher food prices at the grocery store. The CFTC governs U.S. futures markets.

While the legislators' fears about speculators being mainly responsible for driving up commodity prices are mostly unfounded, it's still likely the U.S. Congress will be successful, via jawboning, at pressuring the CFTC to make some changes in the way futures or other derivative markets are traded.

Increases in Margin Money

Key for commodity investors will be if any new futures trading rules will actually be significant or just cosmetic. New rules could include increases in margin money for trading futures, which at present is around 10% of the actual value of the futures contract being traded. Increases in margin requirements are not anything new, as the futures exchanges have been increasing margin money requirements for several months, as commodity futures prices have risen.

Still, margin requirements for trading commodity futures are, at present, well below the margin money deposit required for trading stocks, which is 50% of the value of the stock traded. Any move to substantially increase margin requirements for trading futures markets -- to levels closer to that of stocks -- would most certainly drive away many speculators, which provide important liquidity and relevance to futures markets.

More Oversight

There is also talk in the marketplace that the government could impose new regulations and oversight on the "swap" derivatives market -- especially in the energy markets. Swaps are unregulated derivatives employed by large energy traders, producers and end-users as part of their hedge or trading programs.

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At time of publication, Wyckoff had no positions in the stocks mentioned, although positions may change at any time.

Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.