US CFTC member urges 'deep dive' into factors behind recent commodity price swings

The US Commodity Futures Trading Commission should conduct a series of "deep dive" studies to determine whether prices in commodity markets that have recently seen stress—such as natural gas, crude oil, metals, and wheat markets—are driven by market fundamentals, a member of the commission has recommended.

"From 2020 lows, food prices have soared 84%, fertilizer prices have risen an astonishing 220%, and, as I have discussed, energy prices have climbed sharply and in some cases, reached all-time highs," Commissioner Christy Goldsmith Romero said. At the same time, the Democratic commissioner pointed to a study indicating record profits by Wall Street's biggest banks, commodity trading houses, and commodity-focused hedge funds.

With that in mind, she urged the commission to examine all material elements driving swings in some key commodities, including in food, energy, and metals markets, that have seen significant volatility or price increases.

The findings should be publicly released, she said, to bolster confidence that the derivatives markets are serving their function and that speculation is not artificially inflating consumer prices.

Goldsmith Romero said she made a similar recommendation as well during internal meetings at the CFTC several weeks earlier. The investigations should look at whether the presence of passive investment vehicles and other speculators are providing useful liquidity or other useful functions and "not distorting markets or otherwise undermining the price discovery process," she said.

Physical infrastructure impacts

The Sept. 20 meeting of the CFTC advisory panel, sponsored by Republican Commissioner Summer Mersinger, was held to discuss how physical energy infrastructure can affect price volatility as well as the upcoming role of metals in the energy transition.

Kicking off the meeting, Mersinger emphasized that predictable supply and reliable distribution of physical energy are critical to ensuring the derivatives markets the CFTC regulates serve as effective price discovery tools. And she offered a note of caution about the risks involved.

"Without properly functioning energy futures markets, the financial risks from current global energy-related supply disruptions, as well as the cost of transitioning from traditional energy sources to more renewable forms of energy, have the potential to become systemic risks to our entire economy," she said.

Paul Wight, senior legal adviser to Federal Energy Regulatory Commission member James Danly, an invited speaker, emphasized problems he sees in wholesale power markets, with New England's forward capacity market construct.

In his view, the market is undercut by subsidies for renewables and is short on gas pipelines that are extremely difficult to site in New England.

While designers of that market needed generation capacity in combination with fuel security, he said "that's not what their product is designed to get." The end result, he said, is lots of natural gas generators without firm contracts for natural gas.

Jackie Roberts of the Public Service Commission of West Virginia, an EEMAC member, suggested there could be a greater role for the CFTC to play, both in terms of improving gas-electric system coordination and in relation to capacity markets.

Several participants discussed the interrelation between energy and other commodities such as agriculture or metals.

Cortney Cowley, a senior economist at the Federal Reserve Bank of Kansas City, spoke about how increased energy input costs for farmers can affect their production and how energy supply cuts can ultimately lead to greater commodity price volatility.

Paul Cicio, an associate member of the EEMAC, suggested challenges with gas supply could impact manufacturers' ability to produce aluminum and steel needed for the energy transition.

"If you look at what's kind of alarming to us, whether we're nitrogen, fertilizer, steel, chemicals or plastics, is that we need to produce more gas."

He also suggested there are regional problems with natural gas pipeline capacity.

"I've got manufacturers on [Transcontinental Gas Pipe Line] that will probably be curtailed this winter," he said.

And Derek Sammann of CME Group described forecasted increases in demand for virtually all industrial metals expected to support the energy transition, because of growth in areas such as electric vehicles, energy storage, and renewable energy development.

Going forward, the advisory panel voted to recommend that the CFTC consider creating a subcommittee to provide a report on physical energy infrastructure and its effect on commodity markets. It also agreed to recommend that a subcommittee be created to report on the role of metals markets in transitional energy.