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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18 June 2014 | FueL OIL neWS | www.fueloilnews.com With billions of new dollars coming in chasing a limited number of barrels, and paper contracts rolling over prices in the futures markets kept moving up. And the volume of trades had more than tripled since 2000 from 483,000 thousand contracts in the first quarter of 2001 to 1,397,000 in the first quarter of 2008, according to EIA data. Overwhelmingly the action was on the "long" side of things with these new investors, which was the plan of the index funds driving the action. Masters cited a Goldman Sachs Report from 2008 on the sub- ject: Commodity indices were designed to be long-only investment vehicles in order to create a stable supply of passive buyers to balance the commercial selling. Put simply, the index investors are the buyers of the commodity futures positions that the commercials want to sell in order to hedge their natural exposure to commodity. The Goldman Sachs report also indicated that traditional supply and demand concerns were not that important with these index funds: The buying and selling of index investors is driven by asset allocation decisions, portfolio rebalancing and the shape of the commodity forward curve during the "roll" period, not views on the supply and demand fundamentals. Crude oil prices had been comfortably perched under $25 per barrel from the mid-1980s until 2000. They then began a steady and significant rise and practically doubled from $54 to $93 in 2007. In July of 2008 they topped at $145. By the end of the year, as the recession hit, they collapsed to $40. Obviously, the reces- sion created demand destruction, but the world economy while severely shaken hardly ground to a halt. Taking acTion The fight to address commodity speculation was well under- way by the time the recession arrived. In fact, the impact of financial deregulation relative to housing was barely on the radar at the time. It's not surprising that heating oil dealers pushed for the fight to reregulate commodities (with critical assistance from similarly impacted players not only in oil but other commodities). The massively increased price of heating oil was a critical threat to business. What is surprising is that such an outgunned force achieved so much and so quickly. NEFI and PMAA were the foundational leaders in the push to look at the role speculation was playing in the markets. Jim Collura, NEFI vice president for government affairs, noted that the former NEFI President and CEO Jack Sullivan wanted to make sure the organization had an understanding of what was driving the excessive price volatility. The institute hired Lexicon, a firm in Texas, to analyze the markets and to see what role speculation might be playing. "Lexicon came back, and I believe it was December 2005 or January 2006, with a preliminary report stating that they couldn't tell us what role speculation was playing with com- modity futures because of two major problems," said Collura. "First, the markets are completely opaque and most of the infor- mation wasn't even available to regulators. Many trades were occurring over-the-counter and some of what was occurring on designated contract markets like NYMEX was actually specu- lation disguised as hedging. Second, Wall Street had secured some loopholes that allowed certain activities to be classified as hedging even though they were speculative. So in terms of aggregating commercial versus noncommercial transactions, it was difficult to decipher between the two. I remember sitting in the room and my jaw was on the floor." NEFI made the decision to adapt its public-policy agenda to focus on speculation as main concern. The association identified organizations that were potentially impacted by this and formed what was to become the Commodities Market Oversight Coalition. CMOC is an independent, non-partisan and non-profit alliance of groups that represents commodity- dependent industries, businesses and end-users. The coalition advocates in favor of government policies that promote stabil- ity and confidence in the commodities markets, that seek to prevent fraud, manipulation and excessive speculation and that preserve the interests of bona fide hedgers and consumers. The true reality of the scope of the situation sank in for Sean Cota when he was set to testify before the Senate Energy & Natural Resources Committee on behalf of PMAA and NEFI on April 3, 2008. "When I tried to figure out what was going on—we didn't realize that at the time most of the market was no longer being traded on the traditional platforms," said Cota. "We did not know what the term was at the time, but the swaps market was essentially invented with the CFMA. It became clearer when I was testifying in front of the Senate and I was listening to George Soros who explained—before the housing market collapsed— the problems with securitization in the housing market. How people are incentivized just to move stuff into the market and pawn off these trades onto Fannie and Freddie. He went into some detail about how the money flows into this market. A cold sweat ran down my back as I realized that it's not just housing, it's everything. I realized that the only way we could even address the issues with oil was to tackle the entire financial structure and derivatives and futures markets. And you look at that task and say is there any way that a handful of folks doing the right thing for the right reason can even have an impact?" DoDD-Frank On Sept. 15, 2008, the fourth-largest investment bank in the United States filed Chapter 11. Lehman Brothers' demise marked the general collapse of a bubble economy fueled by subprime mortgages. Fortunately, the industry had made its case in foresight instead of hindsight that the related deregula- tion was also impacting commodity prices. "Having the industry pool together in communicating with legislators that the financial industry was corrupted, and the fact that it happened before the collapse got us credibility. When the collapse happened they actually listened to us," Cota said. "We are some of the few folks that use these markets for the actual physical purposes. Most people utilizing the markets FUELS