France Does Not Like Crude Oil Speculators

By: Andrew_McKillop

France wants Group of 20 nations to limit easy access by the "trading community" to the betting chips, that is derivative holdings and leveraged positions, traders use to speculate on oil. This makes oil prices not only volatile, which perhaps is OK, but at present also makes them rise, which is not OK. Speculative excesses driving down traded natural gas prices to near-record lows are perhaps not surprisingly for a country which imports gas as well as oil, absent from a new French proposal. In a French Finance Ministry report, authored by finance professor J-M Chevalier, the belles idees of France are set out in what reads like a fight for cheap oil in a science fiction trading world of the distant future.

The 61-page report, prepared for France's finance minister Christine Lagarde this month (April), particularly focuses oil futures trading. Speculation on natural gas, as we mentioned, does not feature, nor speculation on interest rate and currency forwards, equity stocks and other lines of business of the trader horde or "community".

Traded natural gas is a perfect example of what French minister Lagarde, a former competition class swimming champion, might call la belle speculation. Since late 2009, trader exuberance and tons of derivatives has driven down natural gas futures in the USA to as low as US$ 3.90 a million BTU, equivalent to oil at US$ 22 a barrel in energy terms.

The French report studiously avoids criticism of traders who talk down gas prices to bargain basement levels, and particularly focuses their bad brothers who talk up oil. For the European Union countries, the report recommends a pure and simple uniform oil tax, perhaps the rate applied in France, which as any French person knows has the best, fairest and most rational taxation anyplace on Earth. Once the French consumer price for oil has been set from on high, this price will apply across the 27-nation Union. Even more free market minded, the report goes on to urge the creation of a few, state regulated regional oil trading platforms, where the sober and serious, state approved traders of the responsible future will work to keep oil prices low.

RELATED DEVELOPMENTS

In a related development, and following the 2008-2009 financial crisis which underlined the dangerous lack of liquidity of commercial banks, and the very high "leverage" or generation of extreme high amounts of funding for speculative share trading, interest rate futures trading, and trading of commodities and other assets, moves are being made to force the banks to hold higher amounts of cash. In the USA, the reaction from bankers has been fast. J P Morgan, Wells Fargo & Co., and Fifth Third Bancorp executives told U.S. regulators in early April that Bank for International Settlements (BIS) plans to bolster banks’ liquidity and curb their derivatives trading are based on the wrong assumptions and risk unintended consequences. French bankers, never far behind their US cousins in cranking up new financial products, will make the same complaint.

The US Federal Reserve, like the European Central Bank, and national ministries including the French Finance Ministry are calling for tighter rules on bank capital and liquidity, and proposals are being drafted by the BIS Committee on Banking Supervision in Basel, Switzerland. Acting to curb commodity market trading excesses - and restricting this to oil trading - appeals to the CO2 conscious leaderships of the OECD countries, of which 27 out of the 30 members are oil importers.

Both the US Federal Reserve, and the US Commodity Futures Trading Commission (CFTC) have toyed with ideas and outline proposals to "curb oil speculation", and rejected these, along with early drafts of the BIS Basel plans. The simple reason is that both commercial banks and private banks earn large and regular commissions, and employ a certain number of people with taxable revenues through creating, selling and trading speculative negotiable instruments. These are "market neutral", at least in theory. The banks, again in theory, are uninterested and unconcerned as to whether their financial products drive oil prices up or drive oil prices down. Their one-liner response will be that "fundamentals do that", and designing financial products that can limit speculation on oil futures when the price moves up, and aid and assist speculation when the price moves down, is something from a Spielberg movie.

FRENCH COURAGE

The report for France's minister Lagarde takes a trenchant line on what it calls conflicts of interest within commodity trading firms, often the subsidiaries of commercial banks or associated with major banks, and calls for new and tighter rules to separate trading from the creation and selling of derivative products. Banks like Societe Generale, one the world's biggest producers and sellers of oil-backed and oil-based SIVs or "structured investment vehicles", will obviously twitch more than somewhat on hearing their very own minister calling for order and decorum. Other belles idees in the Lagarde report recycle notions already abandoned by the US CFTC, such as splitting off the banks and their subsidiary commodity brokerages, and sponsoring the rise of "truly independent" brokers, selected and chosen by their friends in the French government.

This reveals the French obsession with hedge funds, probably due to France coming late to the party, and only having fledgling numbers of smaller-sized hedge funds, many of which closed their doors during the 2008-2009 crisis. Lagarde is battling for tougher rules for hedge funds, and new taxes on banks, to accompany new oil taxes, and controlled sweet-and-low traded oil prices. Imagining so many old, borrowed and half-witted ideas is one thing, but having the courage to publish them is another. For Lagarde and the French government, however, strong action is needed. Following its not so courageous abandonment of the Sarkozy carbon tax idea (proposed in September, abandoned in March) oil trading and rising oil prices are a natural target for French effort- and excellent after dinner debating material.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

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