France and Britain are calling for governments to clamp down on oil market manipulation, the Commodities Futures Trading Commission is considering imposing position limits and CNBC's Jim Cramer has railed on the oil futures market, calling it a farce. This is an issue that traders have also been concerned about for at least two years.
Betting on oil price moves has always been a speculative game; the difference now is the amount of money that's rushed into this market not from traditional hedgers who rely on this commodity for their business but investment firms who are simply hedging risk with another asset class. These "speculators" have put a lot of money to work in the oil market in the last few years.
For the most part these "speculators" don't include the independent floor traders or traders who work for the smaller brokerages. (Some of them wish they could have enough money to be in that group.)
Many of the floor traders like to blame the advent of electronic trading for oil price volatility — but that's just the trading tool used by the bigger forces at work. Really it's the growth of commodity index funds and exchange traded funds that's crushing traditional hedgers and smaller traders — and the money invested in these funds is causing these wild price swings.
The Wall Street Journal reports today that $300 billion was invested in commodities indices last year as oil soared to $147/barrel. As oil prices sank to $33/barrel earlier this year, Bank of America Merrill Lynch says investments in commodities indices fell to $80 billion in February — but swelled to $125 billion by June as oil price rose over $70.
Analyzing these price moves is really about following the money — including money that's on margin and over leveraged. A closer look at the issue from the CFTC and other governments may pressure oil prices in the short-run but if tighter regulations aren't actually put into place, these insane prices moves in the oil market are likely to continue.