US CFTC member urges ‘digging deeper’ into factors behind recent swings in commodity prices
The U.S. Commodity Futures Trading Commission is expected to conduct a series of in-depth studies to determine whether prices in commodity markets that have recently experienced stress – such as natural gas, crude oil, metals and wheat – are determined by market fundamentals, one commissioner recommended.
“Since the 2020 lows, food prices are up 84%, fertilizer prices are up 220% and, as I said, energy prices are up sharply and in some cases, have reached unprecedented heights,” Commissioner Christy Goldsmith Romero said. . At the same time, the Democratic commissioner pointed to a study indicating record profits by Wall Street’s biggest banks, commodity trading houses and commodity-focused hedge funds.
With this in mind, she urged the committee to look at all the material elements behind the swings in some key commodities, including the food, energy and metals markets, which have experienced volatility or significant price increases.
The results should be made public, she said, to build confidence that derivatives markets are serving their purpose and that speculation is not artificially inflating consumer prices.
Goldsmith Romero said she also made a similar recommendation in internal CFTC meetings several weeks earlier. Investigations should consider whether the presence of passive investment vehicles and other speculators provide useful liquidity or other useful functions and “do not distort markets or impair the price discovery process”, it said. she declared.
Impacts on physical infrastructure
The Sept. 20 meeting of the CFTC’s Advisory Board, sponsored by Republican Commissioner Summer Mersinger, was held to discuss how physical energy infrastructure can affect price volatility as well as the future role of metals in the future. energetic transition.
Kicking off the meeting, Mersinger emphasized that a predictable supply and reliable distribution of physical energy is critical to ensuring that CFTC-regulated derivatives markets serve as effective price discovery tools. And she offered a warning about the risks involved.
“Without the proper functioning of energy futures markets, the financial risks associated with the current disruptions in global energy supply, as well as the cost of transitioning from traditional energy sources to more renewable forms of energy, have the potential to become systemic risks to our entire economy,” she said.
Paul Wight, lead counsel to Federal Energy Regulatory Commission member James Danly, keynote speaker, highlighted the problems he sees in wholesale electricity markets, with the building of the capacity market New England futures.
According to him, the market is undermined by renewable energy subsidies and lacks gas pipelines that are extremely difficult to lay in New England.
While designers in this market needed production capability in combination with fuel security, he said “that’s not what their product is designed to achieve.” The end result, he said, is a large number of natural gas generators without firm natural gas contracts.
Jackie Roberts of the West Virginia Public Service Commission, member of EEMAC, suggested that the CFTC could play a greater role, both in terms of improving the coordination of gas-electric systems and in relationship with capacity markets.
Several participants discussed the interrelation between energy and other raw materials such as agriculture or metals.
Cortney Cowley, senior economist at the Federal Reserve Bank of Kansas City, explained how rising energy input costs for farmers can affect their production and how energy supply cuts can ultimately lead to greater price volatility. raw material.
EEMAC associate member Paul Cicio suggested that gas supply challenges could impact manufacturers’ ability to produce the aluminum and steel needed for the energy transition.
“If you look at what worries us a bit, whether we’re nitrogen, fertilizers, steel, chemicals or plastics, it’s that we need to produce more gas.”
He also suggested that there are regional issues with gas pipeline capacity.
“I have manufacturers on [Transcontinental Gas Pipe Line] that will likely be reduced this winter,” he said.
And CME Group’s Derek Sammann described projected increases in demand for virtually every industrial metal expected to support the energy transition, due to growth in areas such as electric vehicles, energy storage and the development of renewable energies.
Going forward, the advisory committee voted to recommend that the CFTC consider establishing a subcommittee to provide a report on physical energy infrastructure and its effect on commodity markets. He also agreed to recommend that a sub-committee be created to report on the role of metals markets in the energy transition.