Rising oil prices are one reason the global economic recovery stalled this spring. Another is the natural disaster that decimated Japan’s industrial output. Japan is rapidly bringing its industrial output back to normal, and that will be helpful to sparking the global economy, but oil is another story. The price of oil is heading higher again after a brief respite earlier this month.
Logically, as the global economy has slowed, growth predictions for the second half of this year have lessened, and the heaviest usage time of the year passes, one would think oil-futures prices would drop. They have not, and the reason is excessive speculation.
A while back, I wrote about this. I wrote one reason excessive speculation was driving oil prices higher was the inability of the Commodities Futures Trading Commission (CFTC) to implement the Dodd-Frank regulations regarding how many oil futures contracts one trader could hold. This rule would “limit traders to 25 percent of deliverable supply in the contract nearest to expiration, followed by an all-month ceiling of 10 percent of open interest up to the first 25,000 contracts and 2.5 percent thereafter.” This rule would curb the undue influence big traders currently have on the market, thus reducing excessive speculation.
I wrote then that three members of the five-member commission were holding the implementation back and the term of one of those members, Michael Dunn, would end in June. I said this would allow President Obama, an avowed supporter of Dodd-Frank, to appoint a more supportive commissioner. This has now happened.
Mark Wetjen, selected as a commissioner to replace outgoing Commissioner Michael Dunn, a Democrat at the CFTC, said the agency should follow the intent of Congress when writing nearly 50 rules to implement the sweeping Dodd-Frank legislation.
I suspect the price of oil will begin to drop toward the end of summer as 1) the CFTC begins implementation of the 50 or so rules regarding commodities, specifically the excessive speculation rule and 2) gasoline use drops as the summer ends. We should not underestimate the influence lower gas prices will have on consumers and their desire to spend. And speaking of commodities …
The National Weather Service issued excessive heat warnings and advisories for wide swaths of the country’s mid-section and along the East Coast from Maine to the Carolinas.
The horribly hot weather above is having an impact on agriculture throughout the country. I suspect the prices of the related commodities will go higher, which will also have an impact on consumer spending. So, hopefully, oil prices will go lower as soft-commodity prices rise and the impact on inflation will be minimal. Along with Japan bringing its industrial output back on line, the predictions for improving second half growth seem realistic. This is good news for the market, as it suggests strong corporate earnings will continue throughout the year.
Trade in the day – Invest in your life …
