The United Nations has released a report bemoaning the “financialization” of crude oil markets, asserting they’ve decoupled from economic events on the ground.As a result, signals about “the relative scarcity of commodities” have been distorted, causing “negative effects on the real economy.”
The UN’s Conference on Trade and Development’s evidence
- Commodity markets volumes are now 20 to 30 times greater than physical production
- Financial investors, who accounted for less than 25 per cent of all market participants in the 1990s, now represent more than 85 per cent; in some extreme cases
They also show that three different major market indices – WTI Crude Oil, the Euro Stoxx 600, and the S&P Goldman Sach Commodities Index – used to respond separately to their respective economic determinants. However, they now move together.
Comparing the evolution of these prices during 2012 with those of the previous decade, the financialization of commodity markets reveals a dramatic change. Despite the similarities in 2002 and 2012 in terms of real shocks – insecurity in West Asia, the aftermath of a stock market crash and a difficult cereals harvest – the evolution of the three indices could not be more different. 10 years ago each market had its own dynamics, but in 2012 they are moving in nearly perfect tandem.
And their conclusion is dire:
In a situation of widespread herding in financial markets, the assumption of an atomistic market, in which participants trade individually and independently of each other on the basis of their own interpretation of fundamentals, no longer holds. The price discovery market mechanism is seriously distorted. Prices can move far from levels justified by the fundamentals for extended periods.