A Step In The Right Direction

NYMEX Light Sweet Crude Oil daily prices from ...

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Today, the world’s consumers will buy about 85 million barrels worth of oil.  That sounds like a lot.  Consider this, as of noon today, the CME Group has sold about 240 million barrels worth of futures contracts for June 2011 delivery of light sweet crude oil. That’s not all of the oil futures sold this morning; it’s just one type for one month’s delivery. My point is simple, a lot more oil is bought in the form of oil futures than is bought in actual oil. This is one reason why I find it laughable for people to suggest that the futures market is not in the driver’s seat with respect to oil prices.

The CME Group announced yesterday that they are going to raise the margin requirements for traders of oil contracts. In other words, it will be harder to borrow money to trade in oil futures. This is a good first step, but this only impacts those who borrow money to trade in oil contracts.

This news made the price of oil futures to fall sharply. Apparently a lot of people have actually been bidding up the price of oil on borrowed money. The mere news of a restriction on being able to borrow money to trade these contracts made the price go down.

If futures were not a major player in setting the price of oil, this news would have had ZERO impact. People are making lots of money by trading futures contracts, and so you will hear many “experts” scoff at the idea that these traders are impacting the price of oil.  They don’t want their golden goose to be killed, and they can spin whatever they like because the average citizen is barely aware of this market.

For those who want to cling to their lessons learned during the 70’s about what caused oil prices to skyrocket, let me say this: during the 70’s the world consumed about 60 million barrels a day, and the futures market sold 0 barrels. That’s right, zero. Trading in oil futures didn’t exist in the 70’s.  Wake up, we’re living in a new world.

The CME Group made a move in the right direction. It is likely just a defensive move to try to mollify those like me who are concerned about the negative impact this trading has on our national security as well as our economy. I look forward to see what the next move will be.

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