Energy Speculation and Oil Futures Contracts – A Regulatory Challenge


We have been studying for years the price of a product reflects the forces of supply and demand. Well, it has changed. Today, prices for goods are set in New York, London and other exchanges traded worldwide.

These days, the price of the product affects the trading strategies of speculators. They buy or sell paper contracts and they have no intent to actually purchase or deliver goods. Traders say this is a great technology, but it is also very dangerous for the system, because when speculation grows large, it has a major impact on prices. Paper contracts affect real lives. This is a high risk for many stakeholders.

In a few years, oil futures held by speculators have nearly tripled. Traders wanting to make money, do not guarantee the price of a commodity.

What is oil futures contract?

An oil futures contract is a legally binding agreement between the parties to buy or sell a certain amount of this product in the future at a certain price. Whoever buys the “long”, and the one that sells the “short” a futures contract

Oil futures are used :.

1. Speculation

Speculators hope that they will profit from anticipated increases or decreases in futures prices. Speculators as arbitrage: They are “long” in one market, and “short” in different markets.

Arbitrage is any technology that utilizes opportunities where the price of buying in one market is lower than the price to sell in other markets. Traders love arbitrage. They buy at a lower price and they sell immediately for a higher price.

2. Hedging

Several companies that produce products or provide services using oil. The oil price is very important for the pricing of products or services. But oil prices can change dramatically. These companies buy or sell oil futures to mitigate (offset) risk.

3. Risk Management.

Parties use forward contracts for risk management. They manage portfolio risk by buying or selling the underlying securities and at the same time by taking a security futures position opposite position in the underlying securities.

price of crude oil has risen from $ 50 to $ 150, and then went back to $ 50 a barrel. Was there a problem with the availability of the product? No, the record of oil in the United States had been over 5 years on average.

The Stop Excessive Energy Speculation Act of 2008 in the United States (July 15, 2008, with Senators Reid, Durbin, Schumer, Dorgan and Murray) tries to control speculation in the oil markets.

The Commodities Futures Trading Commission (CFTC) will be in a better position to punish price manipulation is based on excessive speculation. It will control the “London loophole” and use outside the United States time to work on the price of oil in the United States.

According stop excessive speculation Energy Act of 2008, the CFTC will have the authority to control a large over-the-counter traders to detect price manipulation or excessive speculation.

Compliance with stop excessive speculation Energy Act 2008 means more market transparency, and stronger market controls to reduce the impact of speculation and market manipulation.


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