Could the commodities sector be the next market on the way to more government regulation?
The Commodity Futures Trading Commission (CFTC) is set to hold meetings this month to discuss "limiting the holdings of energy futures traders, including index and exchange-traded funds," reports Bloomberg.
Nearly a year after oil prices climbed to the record high of $147.27, oil prices have dipped below $63 a barrel. In June, oil was trading at $73. A 10-dollar drop in a month is substantial, but oil prices are still up from their low of $33 a barrel back in December.
There are many things behind the movement of oil prices: supply and demand, dollar strength, geopolitics...
But the CFTC wants to make sure that speculation isn't overwhelming these factors.
"Currently," writes Sarah Lynch for The Wall Street Journal, "the CFTC imposes limits on certain agricultural products and allows the exchanges to set limits on such other commodities as energy and metals, in order to protect against manipulation. They are not required, however, to protect against excessive speculation."
But with the large number of institutional investors diversifying into commodities over the last couple years, the potential for huge amounts of money flooding into these markets can have a strong effect on prices.
MarketWatch reports, "A MarketWatch analysis last week showed that passive investors increased their crude-oil holdings to the equivalent of more than 600 million barrels in June, up more than 30% from the end of last year, likely supporting the climb in oil prices."
What happens is once that massive amount of money hits the market, it needs some actual fundamental factors - like supply and demand - to support it.
If fundamental factors don't match up, then prices can fall as quickly as they've climbed.
Crisis Trader editor Christian DeHaemer told his readers, "Oil is dropping back to $63. The next support level is at $59."
But if the CFTC has its way, limits on the size of institutional positions could change the volatility in the market. This is a big departure from the Commission's behavior last year.
The Wall Street Journal reports, "If the CFTC ultimately decides to set limits across energy and other commodities, it would be a major change from the current policy, which hands off much of that authority to the exchanges."
Limiting some of the volatility would put more emphasis on traditional factors, fundamental factors that move commodity prices.
That's why Christian DeHaemer says oil prices could fall to $59 a barrel before they find support. There has been an increase in gasoline stockpiles over the last week, and when supply outweighs demand, prices fall.
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