Things in the Sky

Yesterday’s ATA SmartBrief (a free newsletter that is well worth subscribing to) linked to a letter to the editor of Crain’s Chicago Business from Air Transport Association President James C. May about oil speculation. (The letter can be found here, but registration for a trial subscription is required.)

The letter was in response to the publication’s assertion that the ATA’s efforts to stop oil speculation were “unsuccessful.” While May notes that “we do not count success or failure based on a single event,” he is sure to mention that “just the threat of regulation contributed greatly to the swift drop in price, beginning well before today’s economic crisis.”

Of course, just because the ATA says that’s what happened doesn’t make it true. Click here to see a chart I made on Yahoo Finance, comparing some PowerShares funds:

• DBA tracks corn, wheat, soybeans, and sugar
• DBB follows aluminum, zinc, and copper
• DBC tracks crude oil, heating oil, gold, aluminum, corn, and wheat
• DBO follows crude oil

A look at the aforementioned chart reveals that all of these funds began to move down around the same time. Why shouldn’t the ATA take credit for the decline in the prices of agricultural commodities as well?

May also writes that “with nearly 90 organizations, concerned members of Congress and others in government supporting the call for more monitoring, speculative money started flowing rapidly out of the oil futures market.” This effect isn’t necessarily as good as May makes it sound. Speculative money leaving the market means less liquidity exists, making it harder for the market to work efficiently, potentially causing difficulty for oil traders like airlines trying to hedge fuel.

The drop in price in oil isn’t necessarily bad for all speculators, either. Those who decided to short oil did quite well. But there is one group that did not fare was well with the drop in price supposedly caused by “threat of regulation” – those members of the ATA that have lost millions in hedges.