In what federal agencies concede is a preliminary assessment, the Interagency Task Force on Commodity Markets (ITF) released a staff report concluding that fundamental supply and demand factors provide the best explanation for the recent escalation of crude oil prices. The Commodity Futures Trading Commission (CFTC) formed the task force in June to evaluate developments in commodity markets, in particular investor practices and fundamental supply and demand factors.
The task force said its preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are due largely to fundamental supply and demand factors. “During this same period, activity on the crude oil futures market – as measured by the number of contracts outstanding, trading activity, and the number of traders – has increased significantly,” the ITF report states. “While these increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.”
Strong economic growth worldwide, especially in emerging market countries, has increased the demand for oil substantially in the last five years, while the production of oil “has responded sluggishly” and has been compounded by production shortfalls associated with political unrest in countries with large oil reserves, the ITF report states. “If a group of market participants has systematically driven prices, detailed daily position data should show that that group’s position changes preceded price changes,” the task force said.
The evidence available to date, however, “suggests that changes in futures market participation by speculators have not systematically preceded price changes,” the ITF said. “On the contrary, most speculative traders typically alter their positions following price changes, suggesting that they are responding to new information – just as one would expect in an efficiently operating market.”
The ITF – which is composed of staff members from the departments of Agriculture, Energy and the Treasury; the Board of Governors of the Federal Reserve; the Federal Trade Commission; and the Securities and Exchange Commission – plans to continue its analysis and issue further findings later this year. For example, the task force’s interim report looked at the impact of commodity markets in general but not issues surrounding illegal manipulation of commodity prices. Data on the activities of commodity swap dealers and commodity index traders is expected to become available soon. The ITF’s Interim Report on Crude Oil is available at www.cftc.gov.
The task force’s preliminary findings that speculation isn’t a big problem in skyrocketing oil prices run counter to the conventional wisdom held by many observers. For example, the American Trucking Associations was among 19 business, consumer and union organizations related to transportation that called on Congress in June to enact immediate reforms to “the wildly-speculative energy commodity futures market.”