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A new article posted on the McClatchy website says crude-oil inventories are at levels not seen for almost two decades, demand is at a 10-year low, and refiners are operating at less than 85 percent of capacity. Why have crude oil prices increased more than 70 percent since mid-January and gasoline prices increased 28 cents/gallon in the last month?

We hear that supply and demand drives market prices but these numbers don't support that claim. It appears we are back to the argument about speculators dumping huge sums of money into commodities markets and driving up the prices. Because Wall Street banks are not subject to the same regulations that limit positions in commodities investments, we don't know how much they are dumping into commodities markets. So we will continue to argue this until the Commodity Futures Modernization Act of 2000 is repealed, or at least modified to limit how much the commodities markets can be controlled and manipulated.

As Devilstower reminded us a few days ago in You have the right to be played for a fool:

... At no time during that period (summer of 2000) did California's demand for electricity actually outstrip supply. There was no need for any of the blackouts that struck the state, and no justification for the sharp jumps in electrical cost. Like the 1869 gold panic, it was all manipulation by traders such as Enron, who limited capacity on the electrical grid to simulate a shortage. And it worked.

We don't know if speculators are driving up oil prices. The problem is that there is no way we can know. The same laws, or lack of them, that enabled Enron to manipulate the energy market in 2000 allow for the same kind of manipulation today. Contracts for future deliveries of commodities are traded on the New York Mercantile Exchange (Nymex). The futures market for oil has position limits that restrict how much of the market big speculators can control. Private contracts between big investors are made in over-the-counter markets, that "are thought to be 10 times larger than the futures market, and they have no position limits and no regulation." According to the McClatchy story, Goldman Sachs, Morgan Stanley and others not subject to regulations now far outnumber big fuel consumers such as airlines and trucking companies. These are the same companies that got billions of dollars from taxpayers in the bailout - that was 'necessary' because this same type of behavior.

Michael Masters, a hedge-fund manager who testified before Congress last year, says "...the speculative flow of money into commodities markets is a self-fulfilling prophecy that's distorting the usual process by which buyers and sellers set prices and is driving up the prices of oil, gasoline, grains and other essentials." He also said institutional investors were sucking the air out of the fragile economic recovery. "What they don't realize is because we don't have position limits, the money they put in is driving up the price" for oil and other commodities. I would wager that they do realize they are driving up prices; that may well be the objective.

CNBC television senior energy correspondent Sharon Epperson said in a May 6 report:

Nymex traders tell me they're seeing new money coming in from passive funds that are reallocating assets away from precious metals and into energy holdings. It's this money flow — rather than the fundamental supply-demand data — that's driving oil prices higher.

That is, prices are "disconnected from supply and demand."

In a report from April 16 of last year, the Federal Energy Regulatory Commission said the increases "occurred as large pools of capital flowed into various financial instruments that essentially turn commodities like natural gas into investment vehicles. Ultimately, we believe that financial fundamentals ... explains natural gas prices during the year."

Michael Dunn, acting Chairman of the Commodity Futures Trading Commission, agrees ... sort of. He said, "We were in essence operating with a blindfold on for those over-the-counter markets that we couldn't see." He says "were" and "couldn't" as though the problem he describes is in the past. What he should have said is, "We are operating with a blindfold on for those over-the-counter markets that we can't see." He made the comments during a news news conference last week to announce proposed new regulation of derivatives markets. He also said:

The Modernization Act (of 2000) specifically said we were not going to look at those; we weren't going to regulate them. Times have changed, and now we think it is time for us to look at them. Everybody has an opinion of what drove the market in the energy crisis. Do I think it (speculation) was part of the problem? I do. Do I think it was all of the problem? No. I think monetary policies — a weak dollar — had an impact on it. I think speculation by the herd, people saying prices of fuel are going to go up and I want to get in on that" also played a part.

I don't have a problem with people making a profit. If you don't make a profit, you will go out of business. I do have a problem with people manipulating markets, which is what appears to be happening. Again. It is time to get real regulations back in place.

Originally posted to FWIW on Wed May 27, 2009 at 12:15 AM PDT.

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