The first world’s official futures exchange that had been developed is the Chicago Board of Trade (CBOT). It had been founded in 1848 which it have 82 Chicago merchants. Earlier, in CBOT, there is only exchange between of wheat and cash. The futures contract is for make both parties have written contract in exchange the commodities. In 1849, the commodities that had been traded are flour, timothy seed and hay. In 1851, the products that got popularity among merchants and food processors is corn that is trade in forward contracts. Forward contract is same like futures contracts The futures contract also act as collateral to borrow money from banks. The first dealer will sell the contract to the second dealer, than the farmer will give the orders to other producers. The speculators also entered into the market to make profit. They make profit from buying for the lower prices and then selling at higher prices. Eggs and butter are trade in the Chicago Butter and Egg Board on 1898 and became the major futures exchanges in United States (US). Today, it is known as Chicago Mercantile Exchange. After a few decades, other commodities such as National Raw Silk Exchange, Rubber Exchange of New York and National Metal Exchange were established. On 1936, the regulations of futures and commodities trading were developed by Commodity Exchange Act. This Commodity Exchange Act is developed for avoid the control of whole supply of a particular kind of products in agricultural markets, reduce speculations and stabilize the prices. The Commodity Exchange Act not allows the manipulation on future prices of commodity. The Commodity Exchange Act use the regulation in 1922 Grain Futures Act that state that the commodity futures trading commodities must be trading with licensed. That is meant that the commodities that want to be traded must have a licensed contract. Fraud is not allowed and the brokerage firm must register to the federal government before act as agent to the traders. On 1974, the regulations were added by the Commodity Futures Trading Commissions (CFTC). CTCF sets the daily prices to stop prices volatility. On 1982, the CTCF established its own regulatory body that is the National Futures Association (NFA). NFA is act as an overseer to ensure that futures and commodities industry is done properly. In addition, NFA also act as mediator to stop the argument based in consumer’s complaints. Nowadays, online commodities trading became more popular. In the trading, they have charts, quotes, and strategy analysis and order entry to help the traders make decisions. In this trading the broker can know the traders information such as financial information from the account’s form that had been filled. Not all can be approve because it is only accept traders that have greater financial background.
COMMODITIES FUTURES EXCHANGE
2.1. Commodities futures exchange
Based on definition under the Commodity Exchange Act of 1936, a commodity is defined as every item on which futures trading may be conducted, except onions (trading on onions is not permitted because of prior difficulties of the commodity). A commodity will include such things as interest rates and stock prices, as well as traditional commodities such as wheat and soybeans. Generally, commodity is defined as natural resources, chemicals and physical products that can be touch, taste, smell, grow, mine, consume or deliver. The term of commodities is use for all futures commodity contracts that is includes financial. For example, individual or firm who operates a managed futures program is call as commodity trading advisor. The commodity trading advisor is mostly trade in the financial futures markets such as in interest rate. Nowadays, the most of commodity trades are in the form of financial contracts such as U.S. Treasury Notes, Eurodollars and Standard & Poor’s 500. But, the actually of commodity trades is based on physical products and it is still trade on this while. Futures contract is an agreement between buyer and seller that is for exchange commodity at a specified agreed price and time for delivery in the future. The most popular commodities that trade in this contract are metals, energy, grains, livestock and food and fibre. A commodity futures contract is for delivery the real products. The options to buy or sell the underlying commodities futures contract are also activities in the investing commodity. A commodity exchange or also act as board of trade is a central market which is a place for trading the futures contracts. It is licensed by the government to manage the process of futures contracts trading. Futures exchange also act as clearing house which is responsible for the transfer and settlement of the underlying instruments for the futures contracts.
2.2. The most commodities that had been traded
2.2.1 Metals The underlying instrument in future contract for metal is including copper, gold, platinum, palladium and silver. These types of metal is been using for industrial purpose, construction and for jewellery. The copper have many uses that are for building construction, for electrical and electronic products, transportation and also for industrial machinery manufacturing. This product is most important in the implementation of economy. The prices of copper can be influence by the economic growth. Because of that, the traders are always alert with the price’s copper in the futures. The action that made by the traders is for known or measure the general economic trends. Seasonal demand, political and economic can affect the prices of gold in futures. Gold is use to make hedging for against the geo-political risk and inflation. The central banks will buy gold to increase the value of the country’s currency. In U.S., the trades of metals are at the New York Mercantile Exchange. For the list mini-gold and silver products, it is trade at Chicago Board of Trade’s e-cbot that is electronic platform. 2.2.2 Energy The most popular underlying instrument for energy futures contracts are crude oil, gasoline, heating oil, natural gas and electricity. These underlying instruments can affect to the world economic because it was necessity products. All these products are traded in the New York Mercantile Exchange. The products in the energy are based on the natural resources. It is important because these underlying instruments is use for measure and determined the world economic and political developments. The first product under the energy commodity that traded is oil. The value of U.S. dollar currency is important for trading crude oil because many the crude oil in the world is quote in dollar currency. The futures prices of the energy products are affected by political, economic conditions or weathers. The political relationship with producer countries is important because it can affect to the prices of energy futures. The energy futures are traded at New York Mercantile Exchange (NYMEX). 2.2.3 Grains The major products in his futures contracts are corn, soybeans, soybean oil, soybean meal and wheat. Grain and soybeans are essential for food and feed supplies. Grains and soybeans are essential products that act as food and feed supplies. The prices of these products are affected by weather conditions. The prices of grains can be affected by the weather, energy markets and fuel demand. This is because corn (commodity for grains) is a part for ethanol fuel and the prices will be rise when the consumers’ demand is greater. In these underlying instruments, they have their own popularity or demand. It is because all consumers are not too demand with these products. All these products are traded in the Chicago Board of Trade at United States. In addition, the products are also been trading at Kansas city Board of Trade and Minneapolis Grain Exchange. 2.2.4 Livestock The underlying instruments in the livestock futures exchange are live cattle, feeder cattle, lean hogs and pork bellies. Their prices are affected by the demand for the products, competitors, price of feed and factors that affect to the quantity of animals. All these products are trade at the Chicago Mercantile Exchange. 2.2.5 Food and Fibre The popular products that trade in foods and fibres futures contracts are including cocoa, coffee, cotton, frozen concentrated orange juice (FCOJ) and sugar. The prices of the products can be affected by weather, disease on the plantation, insects and others. The factors of increasing price in this commodity are same as for the grains commodities. Basically, FCOJ’ price is affect from the weather conditions. The growing season in Florida or Brazil can affected to the both of current crop size and also long-term production prospects. But, international exchange rates can affect all of the global products such as the change in the tariffs and geopolitical events in the producers’ states. This is because, the product is trade internationally and can be affected by international factors. Each state has own regulations. And the traders need to follow all the regulations that have stated by the nation to ensure that they can trade legally. In addition, the economic and political situation in each state is different from other states, These products are trade at the New York Mercantile Exchange and ICE Futures U.S., which is formerly as the New York Board of Trade.
ISSUE: OIL STORED AT SEA COULD MEAN BIGGER PROBLEMS AND PRICES IN FUTURE
On the few years before, most big industry make big profits from the stored of oil. The traders will buy oil in the lower prices which is in spot price then will sell the oil when the market price is increase. The price can be increase when the demand is greater than the supply. When the traders store the oil, it can make the supply of oil decline and make the demand above the supply. Even the price of oil is rise, the consumers will buy the oil because oil is a necessity products. in order to control the rising of oil’s price, the authority party force traders to inform more information about over-the-counter (off-exchange) derivatives and take just a small position on the basic commodities. During a meeting of global regulators in Tokyo, Scott O’Malia (commissioner for the Commodities Futures Trading Commission (CFTC) had criticised traders who buy oil and stored it to make profit. He criticised that the traders is try to extract money from the consumers and producers. Some companies practicing a trend known as “contango” that is refer to barrels for delivery further in the future are more higher than barrels for immediate delivery. They know that oil storage can make them gain more profit as a result from exploiting. This trend had started from 2004 in the oil market. This trend is practicing by most big industry such as Trafigura, Glencore and Vitol. The industries buy the oil in spot price and store it. Then, they sell the oil in long-term contracts. They buy the oil in the spot price that is cheaper then they sell in the long-term contracts. The traders are like to use temporary floating tankers even the investment banks had begun to charter ships, leaving the market with a shortage of vessels for transporting other commodities. Floating tankers is being using for store the oil. It receives the oil that is produced from the platforms and stores the oil until it can be transfer to the tanker or transported through a pipeline. The regulators make a study to find whether the oil prices rise is affected either by the withdrawal of supplies and the demand is low or it is the natural on the market. But, it was denied by Commodities Futures Trading Commissions (CFTC). This is because, CFTC analyze on the party that exploit the market. In this few months, the number of storing oil by the traders is drop. And now, the storing of oil is less than before and makes the price of oil drop back to normal. In February this year, Goldman Sachs indicates that the total of hydrocarbons at sea including the barrels in transit is fell to 636m in January. Before that the total storage is 660m and it was declined for 24m. Simpson, Spence & Young is the world’s largest shipbroking companies. SSY is one of the major industries for tanker broking companies. And now, the company measure roughly and found that the number of tankers used for storage oil was fell in January. The number of tankers had been felled by 20pc. Last November before, ships that store crude oil were 149 ships. But, by this February, Gibson measured that the number of ships had been decline to 112 ships. The quantity of ships for store the crude oil had drop by 37 ships. The storage, addition quantity of new terminals that is mostly for oil that is been improving result for globalisation. For example is a new terminal at off the coast of Malaysia. It is jointly owned by Trafigura that is a Dutch Trader. In addition, Vitol also build new terminal on this April at off the coast of Florida. PetroChina also had accepted the leasing of 5m barrel at a facility in St Eustatius, Caribbean. But, there is also producers that not want to open the new facility at global. They were more chosen to ship their oil to the West and wait until it is right time to sell. The producers such as Essar and Reliance think that it is more financially rather than open new facility. The information about the oil such as the amount of oil or who have stored the oil is not enough because of the storage of oil. The traders keep it under-reported and will sell the oil when the prices of oil rise. The information about the actually amount of oil that the traders have and who had store it is important. This is because, the information can ensure that the prices of oil will not increase and can know the actual situation. CFTC is worried with the storage of oil because the information about the amount of storage oil and the owner that store is oil is not known. Estimation made by Deutsche Bank result that up to 100m barrels was in floating storage during the financial crisis. It is more than double of 40m-50m that is figured by industry. The traders keep the information secretly because they want to take advantage when the consumer’s demands of oil increase. The traders are seemed as not guilty on their actions because they just want to make their own profit. But, the actions by the traders become more seem can be blame because no one knows about the storage oil.
4.1. Oil stored could mean bigger problems
Based on the article, oil stored at sea can result to the bigger problems. The traders are practices this storage because they want to take advantages to the consumers when the time is right. Oiled stored can be result to many problems. Because of the storage oil, the information about the oil storage also cannot be known by others especially New York Mercantile Exchange. The traders is practicing the ‘contango’ that is for exploiting to gain more profit.
4.2. Oil stored can affected to the prices in future
From the storage of oil by the traders, the prices of oil will be affected in future. The price of oil will be increase and during this time, the traders will sell oil to market. This is because, the traders want to take advantage to consumers and gain more profit. Consumers will buy the oil even the price is increase because oil is a necessity product. It is need by consumers around the world and they will just ignore about the prices. Because oil is the necessity product, the traders not worried to doing ‘contango’ because the risk is too small. They know that they will guarantee to get profit with it and cannot be lose. The consumers demand will not be decrease and will be higher if they still not get the product.
4.3. The factors of increasing in oil’s price
Oil’s price is rise as a result from the storage of oil by the traders. This is because, when the traders keep the oil in the storage at sea, the supply of oil at market will be decline. The consumer’s demand on oil will not decline because it is necessity product. But, the demand will be higher because the shortage of oil’s supply. When the demand is higher than supply, the price of the product will be increase. This is the intention of the traders. They want to make the prices increase in future with keep the oil in tankers. They want to gain more profit with sell the oil in future rather than sell it immediately.
4.4. The benefits for the traders
The traders will get a benefit from the storage of oil. This is because, the traders will buy the oil on the spot rate from producers, and then sell it in the future. The future price is higher than the spot price because the demand for the product is greater than the supply. The traders will store the oil at sea and wait until the price of oil increase and sell during the time. The traders practice the ‘contango’ plan which is the price of future is higher than a spot price. From the practicing of ‘contango’, the traders will just earn profit without the risk to lose. The traders know that, the consumers’ demand will not decline because there are no products that can be play functions like oil. On the other words, oil cannot be changes with other products.
4.5. The effects to the consumers
The consumers’ oil will get affected on the increasing of oil’s price. It is because, oil is a necessity product for the consumers. Consumers will buy oil even the price is increase. They will ignore about the price and will buy oil with same quantity as before. The consumers not have any other choices but are forces to buy oil in the higher price. The rising in the price of oil can be a burden to the consumers. This is because, when the price of oil increases, it can be affected to the other products. Commonly, the seller of the other products will also take advantages from the rising of oil’s price. This can make the consumers’ expenditure is higher than before. It will make peoples decrease in their wealth.
4.6. The effects to other party
Because of the oil storage by the traders, the other party will affected too. This is not only affected to the consumers of the product. The other party that is affected is New York Mercantile Exchange (NYME). This is because, NYME not get enough information about the actually amount of oil been stored and who store the oil. The amount of oil that been store can affect the prices in NYME. This can make the prices in the market increase because the traders are keeping secret about the amount of oil that is in storage. In addition, commonly the sellers of the other products will also affected by the increasing of oil price. This is because, there are certain of the products are producing using oil. When the oil’s price is increase, then the producer of the other products also increase their products price. They also take advantages on the increasing of oil prices.