Oil Debate: How To Get More Transparency
With oil down today, traders are again debating how we can get more transparency in the oil business, and much of the debate centers on oil futures contracts.
According to Charles Biderman at TrimTabs, there are 2.7 m open interest crude futures contracts in the world.
A futures contract is $1,000 per barrel, so the nominal cost is $135,000 ($135/bbl x $1,000). However, that's not what most traders are really paying. These contracts are typically bought on margin. The average margin requirement is $8,000-$10,000 per contract (about 6 percent of the actual cost of the contract).
So take 2.7 m contracts, multiply by an average of $9,000 per contract, and you get about $25 billion. In other words, you could theoretically control all the oil futures contracts in the world for about $25 billion.
That's about two days worth of consumption: 87 million barrels a day consumed worldwide x $135/barrel = about $24 billion.
I say theoretically, because it's likely that some of these futures contracts are not bought on margin; but the majority probably are.
Still, it’s a pretty startling statistic. A couple questions, which are being actively debated on the Street and in Washington:
1) Why not disclose who the major holders of all these contracts are? They don't have to disclose it now. But equity traders have to disclose. Why not commodity futures traders?
2) And why are margin requirements so low? You can control a $135,000 contract for $8,000--6 percent. It's 50 percent for equity margin requirements. Why not raise margin requirements? Good idea, but it will increase the cost to traders, they grouse.
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