Section One

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Box 1.1 Regulatory reform in the energy derivative markets The push to reform energy market regulation continues, as part of a larger international effort to overhaul the financial regulatory framework. Following the upheaval caused by the financial crisis of 2008, as well as the spike in commodity prices that preceded it, the need to update the regulatory framework has been recognized by policymakers at the highest levels. Indeed, markets have evolved significantly over the last few decades and the recent financial crisis has underscored the fact that financial regulation and financial innovation need to move in tandem. This represents a strong shift in the general ‘deregulatory’ approach that has dominated market oversight since the 1980s. In principle, current initiatives seek to give regulators the necessary mandate and tools to adequately monitor and regulate the market to ensure that the principal market functions of price discovery and risk transfer are not distorted by manipulation or excessive speculation. At the same time, policymakers have recognized the importance of proceeding carefully and avoiding any adverse, unintended consequences, such as reduced market liquidity for bona fide hedging. Broadly speaking, these efforts can be seen to target three general areas in the commodity futures markets: data transparency; speculative position limits; and over-the-counter (OTC) derivatives. Data transparency Efforts in this area focus on providing expanded, more timely and more granular data. This is evident in the improved data transparency for the Nymex WTI contract, published on a weekly basis by the Commodity Futures Trading Commission (CFTC), the US regulator, which allows for a more detailed picture of the impact of speculative activity on crude oil prices. Prior to 2009, data on trader activity on the Nymex was divided into commercial and non-commercial categories. In an effort to improve transparency, the CFTC began publishing disaggregated data divided into four more focused categories: producers and end-users; swap dealers, primarily banks and financial firms; managed money, primarily hedge funds; and other reportables, which was everyone else, including proprietary traders, such as traditional speculators and high frequency traders. Of these, the category of managed money is generally used as a proxy to gauge the extent of speculative activity in the market. More recently, the ICE has begun to publish data on speculative activity for the ICE Brent contract. As data only goes back to 7 June 2011, however, arriving at a 27 Chapter 1
28 better understanding of the impact of speculative activity on the Brent market will take some time. Nonetheless, making the data available to the market represents an important step forward. While the new reporting of Brent data is modelled on the CFTC categories, it is being published by the ICE, rather than the Financial Services Authority, the UK’s financial regulator. These transparency improvements are important for the price discovery process, as they more clearly show periods when the inflow or outflow of speculative funds is impacting prices. Efforts to collect and publish data on OTC derivatives trading activity should also help to develop a better understanding of their impact on commodity price behaviour, including that of crude oil. Speculative position limits The initiative to establish position limits on the major exchanges has proved to be more challenging. The US has already released its proposal that would establish speculative limits on commodity futures contracts and eventually on similar swap derivative contracts. In addition to crude, other commodity future contracts included would be gasoline, heating oil and natural gas, as well as some precious metals and agricultural commodities. However, implementation has been postponed until the end of this year. In addition to the US, the EU is considering some form of position limits, but such a move is far from certain. So far, the ICE has stated that it would voluntarily set position limits on the ICE gasoil contract, although no implementation date has been set thus far. The argument in favour of speculative position limits is clear. Speculation can play a positive market role, providing liquidity when producer and consumer hedging demands are not equal or when the timing of producer and consumer hedging demands do not match. Nevertheless, recent events have shown that excessive speculation can cause prices to detach from fundamentals, distorting the essential price discovery function of the market and potentially leading to the wide price swings as witnessed in 2008. Over-the-counter derivatives Efforts to regulate the OTC market represents a huge and challenging undertaking. According to the CFTC, the notional value of swap derivatives in the US alone is $300 trillion, which represents $20 for every dollar in the US economy. Globally, the OTC market has a notional value of some $600 trillion dollars. In addition to
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Page 4 and 5: Chapter 1 World oil trends: overvie
Page 8 and 9: commodities, the OTC market also in
Page 10 and 11: IHS CERA upstream capital cost MOVE
Page 12 and 13: in the strength of the dollar: in N
Page 14 and 15: to this, there is the dominance of
Page 16 and 17: Although these reduced growth targe
Page 18 and 19: Global and regional population leve
Page 20 and 21: average of 67% of the population in
Page 22 and 23: Table 1.3 Population by urban/rural
Page 24 and 25: Figure 1.8 Real GDP by region in 20
Page 26 and 27: Policies The Reference Case retains
Page 28 and 29: electric vehicles, which focuses on
Page 30 and 31: Box 1.5 Shale gas: recent developme
Page 32 and 33: 40 years. While the early high perf
Page 34 and 35: Box 1.6 After Fukushima: unclear fo
Page 36 and 37: is Japan itself, which has been ask
Page 38 and 39: Figure 1.13 Fossil fuel use per cap
Page 40 and 41: Table 1.6 Medium-term Reference Cas
Page 42 and 43: Table 1.7 World oil demand outlook
Page 44 and 45: low, and well below levels seen in
Page 46 and 47: has also taken into account the pot
Page 48 and 49: stronger than previously expected s
Page 50 and 51: d 0 Conventional Figure 1.22 US & C
Page 52 and 53: Upstream investment Figure 1.25 mb/
Page 54: different picture. By 2035, Annex I
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78 0 Figure 2.2 The distribution of
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80 Table 2.1 Vehicle and passenger
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82 0 1970 1974 1978 1982 1986 1990
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n (millions) 7,000 84 0 China Brazi
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ion (millions) 7,000 6,000 5,000 4,
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88 Conventional powertrain technolo
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90 acquisition costs, and the lower
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92 Figure 2.9 Increase in oil consu
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94 rose by an average of more than
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96 Table 2.10 Oil demand in rail an
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98 Table 2.13 Oil demand growth in
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100 Table 2.14 Oil demand in the pe
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102 2.5 2.0 10 1.5 81.0 60.5 0 mboe
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104 Figure 2.15 Share of industry i
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106 Figure 2.16 Figure 2.16 Oil use
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108 Table 2.19 Oil demand growth in
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110 from 63% to 10% in Southeast As
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112
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114 In Canada, although the Outlook
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116 Non-OPEC Latin America’s prod
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118 additional supply of 180,000 b/
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120 limiting factor for feasible su
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122 Table 3.4 Medium-term non-OPEC
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124 some deposits will not be suffi
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126 1.8 mb/d in 2010, to 2.7 mb/d i
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128 Of utmost importance, in respec
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130 influences and, therefore, brin
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132 early support given to Brazil
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134 the call on OPEC crude by 2035
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136 us to cooperate to lay the foun
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138 Figure 4.1 Table 4.6 Oil supply
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140 COP-16, held in Cancun at the e
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142 in Article 4, paragraph 8, of t
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144 identifies sustainable long-ter
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146 Beyond the oil sector, there ar
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148 other international research an
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Section One

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