Financial firms speculating for their clients or themselves now account for about 81 percent of the oil contracts on the New York Mercantile Exchange.
That’s a far larger share than had previously been estimated by the Commodity Futures Trading Commission — and the figure could rise in coming weeks as the CFTC continues to check the holdings of major traders.
At one point in July, a single company — the Swiss energy conglomerate Vitol — held 11 percent of all the oil contracts on the regulated NYMEX, using the contracts as a profit-making investment rather than a mean to actually acquire fuel, an eye-opening Washington Post report discloses.
“It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the [CFTC’s] laughable assertion that excessive speculation has not contributed to rising energy prices,” said Rep. John Dingell, D-Mich.
Major players on the commodity exchanges often operate as “swap dealers,” investing on behalf of funds and individuals seeking to reap returns without having to buy actual contracts for oil or other commodities.
According to the CFTC, at the end of July just four swap dealers held a third of all NYMEX oil contracts that bet prices would rise.
For most of the past century, only commercial operations — such as farms, manufacturers, and the middlemen who handled their trades — were permitted to make nearly unlimited purchases on the commodity exchanges, while limits were placed on investment firms to prevent them from dominating the markets, The Post reports.
But in 1991, a subsidiary of Goldman Sachs, asked to be granted the same rights as commercial traders, arguing that its business of purchasing commodities for investors was similar to the business of middlemen who carry out transactions for commercial operations. The CFTC granted this request.
Then in 2000, Congress passed a law allowing investors to trade energy commodities on private electronic platforms beyond the oversight of regulators. Critics have called this legislation the “Enron loophole” in the belief the Houston-based energy trader Enron played a role in crafting it.
Private electronic trading platforms were quickly established after the legislation became law.
Since then commodities have become big business for large Wall Street brokerages, and are the strongest business they have right now, according to The Post.
Investment funds have raised their commodity holdings from $13 billion in 2003 to $260 billion this year, and veteran hedge fund manager Michael Masters said in Senate testimony earlier this year that commodity investments by funds could grow to $1 trillion in the coming years.
Masters told The Post that this trend could raise commodity prices for everyone and “have catastrophic economic effects on millions of already stressed U.S. consumers.”
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