Just before crude oil hit its record high in mid-2008, 15 of the world’s largest banks were betting that prices would fall, according to private trading data released by U.S. Senator Bernie Sanders.
The net positions of the banks undermine arguments made by Sanders that speculative trades on Wall Street drove oil prices in 2008, said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston. Retail gasoline reached a record $4.08 a gallon on July 7, 2008, and oil peaked at $147.27 a barrel on July 11 that year.
“If you believe the banks are jerking around the market and the market is going the way they were trading, the price should have been lower,” Pirrong, who reviewed the data, said in an interview.
The records of oil futures and derivatives trades in the first half of 2008 were compiled by the Commodity Futures Trading Commission and made public Aug. 19 by Sanders. Banks including Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and UBS AG collectively held 229,460 net short contracts compared with 101,537 net long contracts, the data show. Short trades make money if prices fall.
Sanders, a Vermont Independent, and other supporters of curbs on speculation have said the CFTC documents demonstrate the need for the agency to complete its rule on so-called position limits. The Dodd-Frank regulatory overhaul enacted last year requires the CFTC to limit traders’ positions in exchange-traded and over-the-counter derivatives for oil, natural gas, wheat and other commodities.
In an Aug. 22 letter to CFTC Chairman Gary Gensler, Sanders said the 2008 data showed that banks and other speculators harmed the economy. “We now know that excessive oil speculation is a major reason why oil prices have risen so sharply,” he wrote.
Asked to comment specifically on the analysis of the banks’ positions, Warren Gunnels, senior policy adviser to Sanders, declined, saying the senator’s office would need more information from the industry and regulators. “The bottom line is that we need the CFTC to obey the law, do its job and eliminate excessive oil speculation,” Gunnels said in an interview.
The position-limits rule, first proposed by the agency in January, spurred more than 13,000 public comments filed with the CFTC from supporters including Delta Air Lines Inc. and opponents including Barclays Capital.
The data released by Sanders lists transactions by more than 200 traders, offering a dated but rare glimpse into an opaque market. It was collected by the CFTC for a Sept. 11, 2008, report on the run-up in oil prices. The agency said at the time that the data had limitations and, while it was the best available snapshot of trading, it might not be definitive.
When the agency told Congress in 2008 that its review found no evidence that non-commercial trading had driven the spikes in prices, three House Democrats questioned the conclusion and sought the underlying data about companies and their positions.
The CFTC data was kept confidential until Sanders publicized it. John Damgard, president of the Futures Industry Association, said in an Aug. 19 statement that the release was of “utmost concern” to the trade group’s members and could “seriously jeopardize the CFTC’s ability to gather information from market participants and carry out its market surveillance mission.”
The CFTC and its inspector general should investigate if any laws were broken because of the leak, the association said on Aug. 25.
Sanders has suggested he acted in part to counter the CFTC’s assertion when it released its January proposal that it needed more data on the private over-the-counter swaps market to implement position limits on contracts that settle outside of the current month.
Sanders’ office said the data he released included both exchange-traded and over-the-counter transactions. “It is my understanding that the CFTC is still claiming that it cannot impose strict speculation limits because it does not have enough information,” Sanders said in the Aug. 22 letter to Gensler. That, Sanders said, is “laughable.”
Steve Adamske, CFTC spokesman, declined to comment on Sanders’s letter.
The swaps market was largely unregulated until those trades helped fuel the 2008 credit crisis. Dodd-Frank, enacted last year, aims to reduce risk, boost transparency and give regulators access to databases of information about exchange-traded and private trades.
Meeting the Burden
Opponents of the position-limit proposal have argued that the agency doesn’t have enough data and that regulators haven’t demonstrated that excessive speculation is driving prices.
“The commission has not met its burden of showing that the proposed position limit regime is ‘necessary’ and ‘appropriate,’” Craig S. Donohue, chief executive of CME Group Inc., the world’s largest futures exchange, wrote in a March 28 letter to the CFTC.
The agency has come under the opposite pressure from Senators Maria Cantwell, a Washington Democrat, Carl Levin, a Michigan Democrat, and Sanders, among other lawmakers. “The CFTC is breaking the law” by not meeting the Jan. 17 deadline set by Dodd-Frank, Sanders said in the Aug. 22 letter.
The agency may vote to complete the position-limit rule as early as Sept. 22, Gensler said Aug. 25. The regulation has split the agency’s five commissioners: Jill E. Sommers, a Republican, opposed the January proposal, while Scott O’Malia, a Republican, and Michael V. Dunn, a Democrat, supported seeking further public comment even as they registered concerns about imposing trading limits. Bart Chilton, a Democrat, has urged the agency to implement the trading curbs.
All banks included in the data released by Sanders held both long and short positions, which when offset against each other provide a net view of expectations of where oil prices were headed. Credit Suisse held the largest net-short position at 109,655 contracts, which was 2.7 times as large as the largest net long position of 41,338 lots held by Deutsche Bank. Each lot represents 1,000 barrels of oil.
“Goldman Sachs, Morgan Stanley and other speculators on Wall Street dominated the crude oil futures market causing tremendous harm to the entire economy,” Sanders said on Aug. 19. Mark Lake, a spokesman at Morgan Stanley, and Andrea Raphael, a spokeswoman at Goldman Sachs, declined to comment.
Pirrong, who has consulted for exchanges and whose research on derivatives regulation has been published by the industry, said that one of the limitations of the CFTC data is that it doesn’t distinguish between banks’ trading positions for their own accounts and those handled for clients.
The aggregate position of the more than 200 traders was net short by 36,327 contracts, according to the data. T. Boone Pickens, the billionaire Texas hedge-fund manager, had 145,257 lots and was net short 1,983, according to the data.
A separate set of CFTC data provided to Bloomberg News by Sanders’s office on Aug. 24 shows commodity index fund investments holding net long positions on Dec. 31, 2007, March 31, 2008 and June 30, 2008. The data, also collected for the CFTC’s 2008 report, shows index funds, institutional investors, sovereign wealth funds and other clients all holding net long positions expecting crude oil to rise.
A third set of data released by Sanders showed six hedge and pension funds with crude positions exceeding so-called accountability levels -- which are set by exchanges, not the CFTC. Traders that exceed accountability levels may be required to provide information about the positions to exchanges, while not necessarily facing hard limits on the overall size of the transactions.
The data shows non-commercial trades on exchanges and in private over-the-counter markets. D.E. Shaw & Co., the now $21-billion hedge fund, and Caisse de Depot et Placement, now Canada’s biggest pension fund, held net short positions. Meanwhile, Bridgewater Associates LP, the hedge fund founded by Ray Dalio, expected crude prices to increase.
Bank Long Short DifferenceDeutsche Bank 273,403 232,065 41,338 Goldman Sachs 451,997 419,324 32,673 UBS AG 100,206 82,383 17,823 Lehman Brothers 154,507 146,165 8,342 Barclays 277,461 276,731 730 Credit Agricole 89,346 88,715 631 Total= 101,537 Credit Suisse 81,638 191,293 -109,655 JPMorgan 200,062 245,261 -45,199 BNP Paribas 106,994 123,944 -16,950 Societe Generale 141,186 155,518 -14,332 Bank of America 50,893 62,412 -11,519 Macquarie Bank 42,611 51,820 -9,209 Citigroup 87,070 94,943 -7,873 Morgan Stanley 312,527 320,223 -7,696 Merrill Lynch 115,396 122,423 -7,027 Total= -229,460