The Guest Blog

Busch: Was Rolling Stone Right?


Bloomberg has a headline today that underscores the inherent contradiction imbedded in the energy markets. "US Diesel Supply Climbs As Goods Orders Slip" details how the fuel that powers heavy trucks to move goods across the USA rose to the highest level in at least 16 years in June. " manufacturing inventories climbed, signaling a need for fewer deliveries." The American Trucking Association For-Hire Truck Tonnage Index rose to 102.3 in May for the first time since February. However, the index was down 11% from May of 2008. April 2009 had plunged 13.2%. So the question remains, why is energy so bid?

Today, we're going to get an Energy Department report that shows that oil supplies probably fell 2 million barrels and this is the fourth week in a row of dropping supplies. The American Petroleum Institute said crude supplies fell 6.8 million barrels and shocked the market. These draw downs are overriding any concerns from the downgrading of global demand out earlier this week by the IEA. Also, the economic rebound from extreme lows is driving demand as well. Today, we had China, Eurozone, UK, and Sweden all report that their purchasing managers index were higher than expected.

Believe it or not, Rolling Stone carries a fairly coherent narrative on Goldman Sachs that comes to the conclusion that GS has been manipulating the markets since the 1930s. It's in the issue with the Jonas Brothers on the cover. While I'm not in agreement with their findings, I believe it's a fun read that has raises some serious questions about manipulation in the energy markets. The section of the article on $4 a gallon gas is worth reading for the information on a letter GS received from the CFTC in 1991 that allowed them to be considered a hedger vs a speculator in the commodity markets.

This question of speculator vs hedger is central to the argument that more regulation is needed. CFTC head Gary Gensler is reviewing his agency's powers as the Obama administration and Congress urge a crackdown on market speculators that they say caused last year's record-high prices for oil, wheat, corn, and other goods. Already, Vermont Senator Bernie Sanders has introduced a bill that would make the CFTC invoke emergency authority to stop oil speculation. You can bet that the recent 88 page regulatory reform proposal will get into these questions under the pretext of a way to stabilize these markets and control them.

On the subject of ETFs and if they contributed to the spike in commodity prices, Gensler on February 4th said that speculative trading in commodity markets has affected prices. "I believe that speculative trading or investing by person who do not produce or use a commodity in order to profit from commodity price changes can affect prices for commodity futures as well as for the underlying commodities.....If confirmed by the Senate, I look forward to working with Congress and my fellow CFTC Commissioners to take a fresh look a the role of speculation in commodity futures markets." Already, the Senate Homeland Security and Governmental Affairs Subcommittee on Investigations has concluded that wheat prices were inflated by index investors.

If Gensler or new regulation reclassifies banks and ETFs from hedgers to speculators, this will potentially be disruptive to the commodity markets. It will decrease the liquidity to these markets and create more volatility. It will certainly hurt the banks at time when we need them to get healthy and increase lending. Like Cap and Trade and Healthcare, this is underscores the fact that the biggest risk to the markets right now remains government policy error.


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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and and you can follow him on Twitter at .