Commodity Trading on the International Market-Oil investors pulled $39 billion in futures, triggering decline |12 September 2008

The report by Michael Masters, president of the Masters Capital Management hedge fund, blamed investors who buy and hold an index of commodities for driving prices to records, and for their subsequent drop. It came a day before the US Commodity Futures Trading Commission was set to discuss its own study of energy trading with a congressional committee.

Masters testified three times before Congress this year, arguing that limits on traders would cut oil prices to $65 to $70 a barrel. He has been cited by lawmakers who introduced at least 20 measures to curb speculation. Congressional pressure on the CFTC to step up enforcement and restrict anonymous trades has pushed index traders out of their positions, Masters said.
 
“I don't think it’s just coincidence that the money came out after the pressure was put on these folks,” Masters, who wants legislation that would set limits on index commodity holdings, said in an interview.

Crude oil futures surged to a record $147.27 on July 11, an increase of 53% for the year, on the New York Mercantile Exchange, then fell 26% to $109.71 on September 2. Oil prices dropped further this week.

“The speculators that drove prices up basically deflated the bubble,” said Fadel Gheit, director of oil and gas research at Oppenheimer Capital in New York. “They said: ‘That’s it, the game is over. We are going to bet on another horse’.”

The commission was expected to release a report yesterday that would lay out its findings on the impact of index investors and over-the-counter trading on commodities. Regulators may require Wall Street banks to regularly disclose their energy futures positions connected to the unregulated swaps market, according to people familiar with the discussions.

JPMorgan Chase and Co., Goldman Sachs Group Inc., Barclays plc and Morgan Stanley control 70% of the commodities swaps positions, and swaps dealers are the largest holders of Nymex crude oil futures contracts, Masters said.

Representatives for all four banks declined to comment. Banks enter into swaps with airlines and hedge funds to profit from moves in crude prices and then offset some of that risk in futures markets such as the Nymex.

“These large financial players have become the primary source of the recent dramatic and damaging price volatility,” Masters said in the report.

Wheat extends gains on US export demand

Wheat climbed for a second day amid speculation that the recent price drop to the lowest in about a month will attract overseas buyers. Corn and soybeans declined.

Wheat rallied 1% on Wednesday last week, ending the longest slide in more than two years.

Japan was seeking 75,000 metric tons of milling wheat at a tender and Bangladesh has been seeking 100,000 tons of wheat for October delivery. Egypt bought 120,000 tons of US wheat last week, part of a purchase that included Canadian and Ukrainian grain.
 
“The price decline to a one-month low earlier this week has encouraged buying interest,” said Takaki Shigemoto, an analyst at Tokyo-based commodity broker Okachi & Co. Wheat is relatively cheaper than corn for animal feed, he said.

The futures have fallen 42% below the record $13.495 set on February 27 after farmers globally increased acreage to take advantage of a 77% price rally in 2007.

Commodity briefs

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• Vietnam to raise rice exports amid rising global prices

• Indian government plans to buy more rice supplies

• Philippines coconut oil exports down by a third in August

• Bangladesh tea prices rise on higher demand overseas

• China set for bumper grain harvest, according to official

• Draft law caps use of Kazakh food crops for biofuel production

 
Crude oil prices

As at 11/09/08

Nymex Crude Future  103.46 US dollars per barrel
Dated Brent Spot    97.63 US dollars per barrel