Trichet: "Reasonable Conjecture" That Investors Distorted Commodity Markets

Now it’s semi-official. A respected financial figure, no less a central bank chief with his reputation still intact, has said in bureaucrat-speak that speculation may indeed have had something to do with recent oil price moves. That view was nearly heretical until the rapid fall in oil prices began in July.

From the Financial Times:

The oil price shock that has hit global growth could have been exaggerated by financial speculation, Jean-Claude Trichet, European Central Bank president, suggested for the first time yesterday.

Yves here. Different turn of phrase, but similar to the argument made by George Soros earlier this year.

Going further than comments by other central bankers, Mr Trichet argued it was “reasonable conjecture” that financial investors had distorted commodity markets, leading to prices above those justified by fundamental supply and demand factors.

His remarks were significant because they indicated policymakers believe this year’s peaks in oil prices were unsustainable…

Further falls in energy prices would strengthen ECB optimism that weak eurozone growth will be followed by a “progressive recovery” later this year.

Speaking at a Centre for Financial Studies “ECB watchers” conference in Frankfurt, Mr Trichet argued that, in one “benign” view, investors could have played a helpful role in commodity markets by expanding liquidity and making price-setting processes more efficient. The volatility created “might have been the price to pay to avoid even higher volatility in the future”, he said.

That is long-form for “meddling can have unexpected consequences”.

But the ECB president also said that financial investors had encouraged sellers to accumulate inventories or delay production, so as to take advantage of expected higher prices. This could have exaggerated changes in prices beyond what would have been expected by fundamental economic factors.

Mr Trichet added: “If this seems to me a reasonable conjecture, I admit, though, that existing evidence does not provide uncontroversial support the notion that non-commercial investors in futures markets have been systematically playing a significant role in pushing spot prices out of their fundamental equilibrium.”

Sadly, that shows that the officialdom still does not comprehend that oil contracts (the kind commercial buyers enter into with producers, not the futures exchange type) set prices based on futures marker prices, not spot. It’s troubling that someone like Trichet, who has staff that can get to the bottom of things on his behalf, does not understand price setting mechanisms in a market so important to his policies.

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  1. Anonymous

    Every market has been turned into a casino. This has very little to do with efficient allocation of capital and may in fact be the death throws of the capitalistic system. These market are no where near bottom.

  2. Freude Bud

    Yo no comprendo.

    Cash market contracts for crude are either cargo or long term (usually one year) contracts.

    Cargo contracts are priced at a differential to a marker price, meaning the spot price on the futures market of some futures contract, depending on the difference in quality of the crude in question, commercial concerns, etc.

    One year contracts are priced at a differential to a marker price, meaning the spot price on the futures market of some futures contract, depending on the difference in quality of the crude in question, commercial concerns, etc., usually on a monthly average …

    Futures spot prices are the marker prices that the cash market prices their contracts at a differential to.

    Beyond that, I just don’t understand what is meant by “speculator” here … everyone in the market is a speculator … they are all speculating on the future.

    There is no a priori way to know whether a “commercial” trader is making a trade based on the calculus of an increase in market value beyond his physical holdings anyway. The restatement of the CFTC was precisely that, a commercial trader was reclassified as a non-commercial.

    Does good vs bad speculation just mean we don’t like the consequences of speculation in this particular example, but feel all warm and fuzzy about it in another?

  3. pjfny

    freude bud, I totally agree with you…..when the government is de-basing the currency, and de-leverging is de-basing financial assets, aren’t we all hedgers?
    airlines and other corporate hedgers who did not hedge with oil between $50-100, were panic hedging (for survival) and pushing the mkt to 140, which is the explanation for far out futures above spot oil….”speculators, have no reason to buy far out illiquid futures.

  4. Yves Smith


    Apologies for not providing links or further background. There was a period when we were on the oil beat almost daily, and some of the issues you mentioned were discussed at considerable length.

    On price formation, see “Futures Prices Determine Physical Oil Prices.”

    On speculation, we have complained that the term covers too many types of activity. As the Eskimos allegedly have lots of words for “snow”, we need more precise categories here.

    The reason for using the term so broadly here is that there was a pretty strong consensus pre-July that the price runup was NOT due to speculation, no matter how narrowly or broadly one defined it, but supply and demand. We discussed quite a few phenomena that said the picture was far from simple: the fact that there was high demand for the sweetest grades of crude, which are also heavily represented in the benchmark contracts, distorting the perception of conditions in the entire marketplace; the undue reliance on inventories, when storage is costly and not efficacious and oil can also be stored in the ground; the fact that oil producers look at oil inventories as a short-term investment, just like financial instruments, and consider the near-term profit potential in deciding what level of inventories to carry.

    You have the separate issue that commodities, strictly speaking, really are not an “investment” as in they do not support productive enterprise, but are really a store of value. Indeed, Miichael Frankfurter, a commodities industry analyst, has written papers that discuss how managed commodity futures are not an asset class

  5. Cash Mundy

    I would very much like to hear parties better-informed than myself discuss the possible utility of oil price manipulation for geopolitical ends. I have done some searches and other than Engdahl’s paper on speculation, have come up with little.

    The reinvigoration of Russia is frequently linked to oil income. Venezuela and Iran cannot be considered without reference to oil.

    I indulged in some wild speculation regarding oil price and a possible attack on Iran.

    Oil price manipulation, if reliably effective, would be a very valuable policy tool. I am not asserting that such manipulation is possible, or that it could be wielded politically, just that it probably would be if convenient.

  6. Freude Bud

    Ah, I see, Trichet appears to be saying that the cash market spot price (for WTI or some such) is being put out of whack by the futures markets, which you are right, basically, wouldn’t matter a hell of a lot in the global oil market. I saw Trichet’s reference to spot and read/heard futures market spot.

    It seems to me that in terms of productivity, the investment in oil futures by “non-commercials” does serve the very valuable social function of making it much more economically attractive to invest in the production of said commodity.

    @ Cash Mundy, I generally think the Bush Administration has had a policy of putting support under the price of oil, though not for geopolitical ends as much as

    a) high price of oil makes investment in agricultural endeavors more profitable. Many red states are basically ag states.

    b) high price of oil brings a lot of idled drilling on-line in … most of the rest of the red states.

    c) high price of oil encourages investment in alternative energy, which is in the interests of the United States.

    You will note that Iran at times appeared to be hoarding in expectation of a higher price, specifically heavy crudes in tankers in the Persian Gulf. But Iran imports about 75% of their food requirement, and, so I suspect that this might have been done in order to try and indicate the costs of an attack to the Administration in DC, but ultimately proves self-defeating in Tehran.

  7. Juan


    There is no duality, spot on one side and futures on the other, since the latter is where price formation for benchmark crudes takes place. You are correct to say that other grades of crude reference (+/-) to these marker crudes but it is incorrect to think prices for marker grades are set through the physical trade.

    Heck, even prior to the modern oil price regime, S/D type models didn’t really apply too well; different forms of managed pricing have been used for over a century but post-1987 and particularly post-2000, price management became a function of the trade in paper barrels, a trade that is largely determinant of spot.

    As Oxford Energy’s Robert Mabro put it in a 2005 paper:

    A tidy mind will find it odd that the reference price for a physical commodity should be borrowed from a market where people buy or sell a contract that carries its name but which is only partly related to it.

  8. Cash Mundy

    @FB, Thanks, interesting information, especially about Iran importing most food.
    Assuming the oil market could be reliably rigged more than short-term (not at all clear given the complexity) it could be done for domestic purposes (drive up price then deflate pre-election to benefit incumbent party) as well as to further international projects, assuming the putative market controllers could agree an agenda and not be detected and counteracted by other participants; a lot of ifs.

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