Oil market collapse waiting to happen

[ensho]

http://www.atimes.com/atimes/Global_Economy/JI19Dj02.html


After a phenomenal "spike" in oil prices to US$147 per barrel, the price has declined to just over $90. In the US this led to a "spike" to $4 per gallon of gasoline and placed energy prices right at the top of the US political agenda. Moreover, this political interest rapidly crossed the Atlantic since British trading of US contracts was believed to be instrumental in a speculative oil market price "bubble".

In view of my background in energy markets - I was for several years director of compliance and market supervision at the International Petroleum Exchange (which is now ICE Futures Europe) - I was asked recently by the British parliament's Treasury Select Committee to give evidence to them in relation to regulation of oil markets. Such an inquiry is a new direction for the committee, and following this initial hearing they decided to commence a full-blown Inquiry - in the finest US tradition - in October.

I told the committee - and their subsequent initial questioning that day of British regulators implied that my message was understood - that to follow the US approach to regulation of oil futures markets would be to try and solve today's problems with yesterday's tools.

-snip-

Most people - including virtually all mainstream press reporters - believe that it is the price of futures contracts that is used as a benchmark. In fact, it is the reported "spot" market price of "dated" Brent/BFOE (see below) cargo transactions that constitutes the direct and indirect benchmark for most global oil transactions. The massively traded ICE Futures Europe Brent/BFOE Crude Oil contract is merely a financial bet on these underlying prices, and these financial contracts are settled in cash, not oil.

-snip-

Could these transactions have been instrumental in causing an oil market speculative bubble?

The answer is obvious: of course they could, and in all likelihood, they did. Unfortunately, because the transactions directly affecting the BFOE price took place off-exchange, not only does no regulator know, but none is in a position to know. Worse than that, even if regulators did know, there are no agreed market regulatory standards to enforce, and any offenders are for the most part smugly immune from enforcement action in offshore jurisdictions in any case.

-snip-

I pointed out that current levels of gearing and risk, and the concentration of risk in single points of failure, together mean that the only difference between "economic terrorists" and proprietary traders such as hedge funds is motive. The former would destroy a market deliberately: the latter by accident.

While the oil market survived the recent storm surge of money, the inevitability of future waves of speculative money sweeping into the market, mean that an oil market meltdown is an accident waiting to happen.
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"The former would destroy a market deliberately: the latter by accident."

[aquart]

1. Energy is too vital to national security to be in private hands.

Now that we've broken the ice on nationalization, nationalize our energy industry. Make American industry competitive again.

[Oregone]

2. Im going to go around the room with my hat. Please put in 5 bucks if you can...

We can't let these people fail. Theyve done so much for us, its time for us to bake sale their way into the black.