Since our last monthly report an event occurred with the potential to affect the oil market significantly: President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21st. The objective of his legislation is to bring the huge and largely unregulated over-the-counter (OTC) derivatives markets under much ighter supervision in order to curb 'excessive speculation'. The plan is to achieve this by forcing as many OTC contracts as possible into standardised forms, processed by centralised clearing houses, by establishing position limits or speculative trades and by preventing banks from using etail deposits and cheap federal loans to engage in proprietary trading. Although oil-related OTC contracts are a tiny fraction (much less than 0.5%) of the total derivatives market and had no connection with the explosive credit default swaps (CDS) that brought down Bear Stearns and Lehman Brothers in 2008 and threatened he global financial system, they will be subject to tighter controls, with unknowable consequences for the oil ndustry. The intention is to take the steam out of commodity price speculation, but position limits might well ncrease volatility and higher margins/capital requirements or non-standard contracts would make OTC trading much more expensive and deny many users an efficient way of handling the 'basis risk' associated with oil products not raded on futures exchanges.
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