Dollars and Jens
Monday, October 02, 2006
market effects of index trading
Gasoline prices are down notably in the past month or so; the reasons are primarily the obvious prosaic ones (ordinary seasonal demand fluctuations, and that the market had braced for potential supply disruptions — most notably hurricanes — that never materialized), but purely trading effects may have had a role as well:
Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index’s weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings.This is the sort of thing I would expect to have mostly a transitory effect, but there might be a small sustained impact, and it would certainly have the potential to trigger a move that might not otherwise have happened so soon.
“They started unwinding their positions, and those other longs also rushed to the door at the same time,” said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.
...Goldman’s announcement on Aug. 9 was not the only downward pressure on prices that week, market participants stress. And while it may have played a part in sending prices down, the market would never have continued its downward trend unless supplies had loosened up, they say.
Also during that week, climatologists revised their hurricane forecasts, easing fears that oil supplies could be disrupted. And BP said it would still produce some oil from its field in Prudhoe Bay, Alaska, where leaks were being repaired. Meanwhile, the peak gasoline season was ending, and new supplies of ethanol were coming online.