Fuel Oil News

Fuel Oil News June 2014

The home heating oil industry has a long and proud history, and Fuel Oil News has been there supporting it since 1935. It is an industry that has faced many challenges during that time. In its 77th year, Fuel Oil News is doing more than just holding

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FUELS By Keith Reid Oil Speculation Revisited An Industry Perspective on Where We Stand Four years after Dodd-Frank A n unusual and disturbing pattern with oil prices started to develop as we moved into the new millen- nium. Price volatility, always an issue to some extent, became frequent and pronounced. And oil prices, which had been depressed the previous decade, started a gradual but continuous climb. These developments were hard to miss, and while the causes were obviously upstream they called for investigation and eventually action. "It's been a decade since we first engaged in trying to fig- ure out what had changed in commodities," said Sean Cota, a partner at the industry consultancy Lake Rudd Capital Partners. He is formerly the co-owner and president of Cota and Cota Heating Fuels of Bellows Falls, Vt. "You [previously] could look at the supply and demand of products and deter- mine within a rough parameter what was likely going to occur from a hedging standpoint. Although you had volatility in certain emergency situations, outside of that there really was not a lot of volatility in the market. What I saw in 2004 was that nothing made sense anymore." Cota, an active leader in the industry involved with both the New England Fuel Institute and Petroleum Marketers Association of America, has been a key player in the battle explore address the upheavals in the commodity markets. He has appeared on "60 Minutes" discussing the issue and at one point he was being pushed as a potential com- missioner candidate for the Commodity Futures Trading Commission. He has severed as a member of the CFTC Energy and Environmental Markets Advisory Committee. A variety of issues were being cited for this fundamen- tal change in the markets, with the primary one being a tight crude oil market where a "peak oil" component was butting heads with the actual and/or projected increase in demand for oil among rapidly developing countries like China and India. This was seen as impacting price gener- ally and enhancing the volatility when any potential or real supply disruption occurred. Also cited was a devalued U.S. dollar, the trading cur- rency for commodities like oil, where a declining dollar would naturally increase the price of oil purchased with dollars in a global market. Speculation in the commodity markets was also cited as a possible driver (and not just for oil, but for similar spikes in a range of commodities). There was plenty of opposi- tion to this view, particularly in the financial and business media and financial institutions like Goldman Sachs that were pushing their index funds. The Energy Information Administration also downplayed this aspect. Economists also cited academic explanations for why speculation could not be occurring—often overlooking real world distinctions in specific markets like crude oil. For example, in June 2008, Paul Krugman wrote in The New York Times: "A futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that's true no matter how many Joe Shmoes there are—that is, no matter how big the positions are." Academically that is a fair statement. But, Krugman's 16 June 2014 | FueL OIL neWS | www.fueloilnews.com President Barack Obama meets with Rep. Barney Frank, (D-MA), Sen. Dick Durbin, (D-IL), and Sen. Chris Dodd, (D-CT), in the Green Room of the White House prior to a financial regulatory reform announcement June 17, 2009.

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