Why Speculators Are Good for the Oil Market
05/30/08 - 09:34 AM EDT
Simon Constable
The CFTC confirms that nothing much has changed since then.
In particular, the report pushed back on assertions blaming index funds, instead saying, "price changes are largely unrelated to fund trading." The report also points to record agriculture prices -- including those for durum wheat and hay, where there are no futures contracts - "and in markets with little or no index trading." Markets where index trading is relatively heavy, such as live cattle and hog futures, have actually seen falling prices. Also important: speculators facilitate the efficient functioning of commodities markets. "The markets for commodities are extremely small," says Jeff Christian, managing director of specialty commodities consulting firm CPM Group, and a veteran of the last materials boom in the 1970s. "If you were limited to the physical side, these markets would be too small to be relevant." Put that in perspective. Oil is by far the biggest of the commodity markets and yet, at current prices, the value of the oil produced each day totals a mere $11 billion. Not much compared with the $162 billion traded on the New York Stock Exchange(NYX Quote - Cramer on NYX - Stock Picks) every day. Commodity consumers and producers need the liquidity provided by speculators because they often rely on the futures markets to siphon off their risk. An oil producer such as ExxonMobil(XOM Quote - Cramer on XOM - Stock Picks) might look to lock in a portion of revenue for some of its output, while a food processor such as Archer Daniels Midland(ADM Quote - Cramer on ADM - Stock Picks) could seek to hedge its costs of buying grain.
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