To avoid volatility, stop trading – Ed Seykota
Bloomberg reported on the IEF meeting in Cancun in an article called “OPEC, IEA, IEF to Unveil Measure to Combat Oil-Price Volatility.”
After reading the article a few times, I’m of the mind that the market knows more than any bureaucrat or government agency here or elsewhere.
Here is one thing that I believe will lower volatility in crude oil futures trading:
1. Lower margin requirements to allow for more participants, therefore, increased liquidity.
As far as everything else listed in the article, it’s all political, biased, and agenda-based. I don’t know who of the CFTC, FIA, or MFA was at the conference in Cancun.
As far as peak oil is concerned, demand for crude did wane, but production fell faster. Who controls production and what incentive do they have to be “open and honest” with their counterparts, or in the case of OPEC, other member nations?
2. Implied volatility tells you nothing about the future – it’s not predictive at all.
3. American driving patterns and heating oil consumption are seasonal, and are fairly predictable year over year. Who is Secretary El-Badri of OPEC kidding? He applauded the U.S. for “putting some brakes on speculation. It’s a positive step in the right direction.”
Really? How about creating a standard within OPEC to consistently meet the world’s needs for crude oil and it’s distillates.
4. OPEC is the world’s largest commodity pool and isolated group of speculators on the planet. Collectively, they control 40% of the world’s oil. I don’t think anyone at the CFTC thinks of them that way though, probably b/c they can’t regulate them.
High prices cure high prices. We have to live with the fact that OPEC members can turn the spigot on an off at will.
Regarding CFTC Limits
“The U.S. Commodity Futures Trading Commission, which oversees more than $5 trillion in daily trading, in January proposed adding limits to the energy markets as part of a government campaign to prevent individuals or companies from gaining too much control of a commodity market.”
5. Individuals and companies don’t want to control an expiration month or several of them. It’s too illiquid and can lead to catastrophic losses. The US commodities markets have never had such a meltdown such as the subprime morass.