This is truly a weak area in my repertoire and while I’m able to burrow through medical information and law information fairly adeptly, economics somehow seems beyond my grasp, which is highly frustrating, but all that is only relevant to my request for someone to please explain this article in simple (just above See Jack Run, Run Jack Run, would be good…) terms.
I’m placing this in GQ as I’m really not looking for a debate or opinion on what it’s saying, mostly because I have such little understanding that it would be impossible to debate or opine (although I know that doesn’t always stop people…).
It seems pretty straightforward. Oil is bought and sold in a commodities market. Commodities are goods that are essentially identical regardless of where they come from - ie crude oil, gold, wheat, minerals, agricultural goods, etc. So anyone who sells crude oil is competing against everyone else who sells crude oil because buyers don’t care who they buy it from.
Now the price of many commodities fluctuates over time. Especially stuff that’s grown or dependent on seasonal factors. Crude oil is one of those commodities. Traders can buy “futures contracts” where they agree to purchase a particular quantity at some later point in time. Ideally, you will purchase your contract at a lower price than the actual price on that day and make a profit.
What the article is talking about is traders artificially manipulating the price. So maybe if they have a future contract for a certain date, they might make a lot of small trades that creates some buzz in the market and drives the price up temporarily. Just long enough to cash out on their contracts for a little extra money.
Or, if you happen to own the storage tanks, you have market information that other people aren’t privy to. You could use that information to your own benefit. Kind of like if you worked for a widget factory and started stockpiling widgets because you know the widget machine will be out of service for a week.
Federal investigators are looking at how oil is stored, delivered, purchased, and traded to determine whether anything fraudulent is going on. For example, is someone reporting that their oil tanks are empty when they are in fact full, and then trading based on his hidden knowledge? Another thing is the futures contracts for benchmark crude oils (like West Texas Intermediate). Is there any insider information or fraudulent activity going on in those markets (WTI is traded on the NY Merchantile Exchange).
The ways these problems can influence pricing are twofold: (1) as the Fed loosens money intending to help with the mortgage crisis, investors may be using it on wild short term speculations; and (2) unscrupulous investors and traders could artificially inflate the price of oil and take a profit while doing it.
Doubters are saying that the CFTC (Commodity Futures Trading Commission) investigation and new regulations will likely have little or no impact on prices, since there are so many other contributing factors and matters that are outside the CFTC’s control and jurisdiction, like Chinese and other foreign boom markets.
Even if they’re successful, one catch-22 is that if prices do fall suddenly, some retirement and savings portfolios will suffer, since a lot of investors might bail on oil futures. These futures are the most likely to be effected by what the CFTC does, since investors will lose a lot of their enthusiasm and many will just drop out.