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Would Oil Prices Really Fall If Speculation Was Reined In?

If raising the margin requirement—or downpayment—on silver contracts helped cool speculation in the metal this week, could it do the same thing for runaway oil prices?

Silver has plunged 20 percent in recent days, in part due to the sharp increase in the amount of money investors are required to put down to buy the metal.

The whole commodity sector, in fact, is going through a major pullback this week as worries about a slowdown in the global economy are prompting investors to scale back on risky trades.

But while the selloff in silver, at least, is being linked partly to higher margins, oil prices move on more fundamental reasons such as supply and demand. Oil was lower on Wednesday, for instance, because of a bigger-than-expected increase in US crude supplies.

So raising margin requirements on oil—which has been tried before—wouldn't do much to bring prices lower.

“I don’t think it would be the same, just because of the amount of dollars chasing the silver trade,” says Justin Wiggs, vice president of trading at Stifel Nicolaus in Baltimore. “Because the amount of margin being used was so much higher and just given how hot the tape has been, you’ve got a lot more hedges playing and a lot more retail guys playing.”

As silver speculation rampaged and drove prices of the white metal to near $50 an ounce, exchanges took stern measures to rein in the trade.

The COMEX on Wednesday raised its margin requirements for the third day in a row—from $14,513 to $16,200 for initial margin and $10,750 to $12,000 for maintenance margin—which represents nearly a tripling in the cost since February.

The higher margin rules, as well as an unwinding in positions within high-volume exchange-traded funds, has driven silver to lows it hasn’t seen since early April.

Oil, meanwhile, has surged more than 25 percent since the mid-February uprising in Libya, pushing the cost of gasoline for most US consumers to $4 a gallon.

Both the New York Mercantile Exchange and the Intercontinental Exchange tried hiking crude margins back in February when oil broke above $100. The move affected futures for a day or two, but the price trajectory quickly continued higher.

A similar hue and cry came in 2008 when oil reached its historic nominal high of $147 a barrel. Speculators were blamed then as well, with calls coming to require that only those taking physical delivery could buy oil contracts.

But a fast-moving recession and the collapse of the banking system quickly settled the argument, sending crude prices below $40 a barrel and dispersing calls for a crackdown on commodity speculation.

“Even though the root of metals pricing as well as oil pricing is dollar-denominated, I still like to associate metals separately from oil,” says Todd Schoenberger, managing director at LandColt Trading in Lewes, Del. “The only reason for that is oil is much more important to humans than any of the metals ever will be.”

In fact, Schoenberger thinks there’s little to prevent oil from continuing to surge.

“You can’t ignore supply and demand concerns. When we start talking about a global recovery, you can only think oil prices can continue to go higher,” he says. “There’s such a small margin between what humans use globally and what we pump out of the earth daily.”

Still, the whole commodity sector has been taking a beating that has largely coincided with the drop of silver.

Deep-pocketed investors like George Soros have ditched their positions in the metal, sending commodities lower even as the dollar keeps falling. Commodities usually rise on dollar weakness because they are priced in greenbacks and thus cheaper on the global markets when bought with more valuable currencies.

It seems for now, then, that only a momentum trade can push oil lower, with margin moves from the exchanges of little help.

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