Monday, May 9, 2011

How To Lower Oil Prices NOW!

Kenneth M. O’Brien

At present a futures trader can control $100 of oil futures contracts with only $6.

This is the magic of what’s called “buying on margin”.

It is the basis for a great deal of speculation in the commodities markets.

It is the Exchanges that dictate the margin requirements on commodities contracts based on their assessment of market risk.

But, there is another, more insidious, element of margin requirements.

Exchanges make their money based upon trading volume. Raising margin requirements requires traders to put in more cash up front. As a consequence it lowers trading volume and Exchange profitability.

Nothing has made this clearer than last week’s sell off in the silver market.

”By the close of trading on Wednesday, May 4th, the silver market had experienced significant selling pressure that drove prices down by 17.3% from Thursday, April 28th.  This sell off corresponded exactly to a series of increased margin requirements by the COMEX  for trading silver futures contracts”. (Gold and Silver Blog, May 6, 2011)

’”If you have the margin raised, that takes capital out of your position,’ said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. “You have to reduce your position to balance your margin account.”’ (Bloomberg, February 24, 2011)

A year ago only $4.25 was required to control $100 worth of silver futures. As of Monday, May 9, that amount will have increased to $21.60 per $100 of contract value.

Can there be any doubt that the low margin requirements on oil contracts fuel a speculative market, just as it did in silver? Similarly, can there be any doubt that a similar rise in oil futures margins would result in a similar decline in oil prices by from $10 to $20 per barrel?

All that stands in the way is the profit motive on the part of Exchanges that control these margin requirements. Increased margins would result in a decline in trading volumes and thus a drop in their profitability.

The questions to be asked is can Congress and the Executive act to institute such a mandate, or are they too beholden to their Wall Street paymasters?

(Additional statements that support this policy option were provided prior to the evidence of developments in the silver market by Senator Jay Rockefeller and Senator Bill Nelson.) .

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