Speculators weren’t the oil-price culprits after all
A few weeks ago, every politician in Washington seemed to be blaming speculators for driving up oil prices last year. The chairman of the Commodity Futures Trading Commission said in July that the agency was likely to clamp down on speculation. His attacks were long on rhetoric and short on data, but now, the Economist reports, the CFTC has released some actual numbers:
What do the new data show? Swap dealers and managed-money investors on NYMEX, the New York commodities exchange, were both long on oil as of September 1st-the latter by more than a 2-to-1 ratio…. Producers and users, by contrast, were net short on oil. Swap dealers and managed-money players outnumber physical traders.
But analysts at Barclays Capital note that swap dealers still accounted for just 6.4% of total options and futures contracts, not enough to drive prices up on their own. Physical traders held more of the outstanding long positions (10.3%), and held even more short positions. This one set of numbers, in other words, does little to prove that speculators are overriding market fundamentals to influence prices. New quarterly data also released by the CFTC this month show that money flows to exchange-traded funds (ETFs) for commodities failed to correlate strongly with last year’s price surge.
In other words, the blame-evil-speculators movement appears to have overstated its case. Again. As I pointed out in a July column, speculators actually do some good by increasing liquidity in the markets, which brings down trading costs for airlines, drillers and others who have a legitimate reason to hedge.
(8 votes, average: 2.5 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
david…all due respect. nobody is calling them “evil speculators.” furthermore, it doesn’t do the debate any good to frame critics of paper commodity markets that way.
if you’ve learned anything from the last 18 months, its that excess speculation/liquidity are inherently destabilizing. just like you had no clue about the full extent of the destruction that asset-backed securities markets could have had on a global economic scale, you have no idea how the commodity/oil markets work and the potential damage they can do.
the cftc data is not even the tip of the iceberg. most importantly, it doesn’t take the physical markets into account.
i suggest you get the full story from the following:
http://www.theoildrum.com/node/5606 - Chris Cook, fmr head of the IPE (now owned by ICE). Regularly saw the pysical/paper interchange and its glarlingly weak points.
http://peakoildebunked.blogspot.com/search?q=bwave - more background on how physical and paper markets interact.
and just to quote Krugman (who defended 150 oil at one point):
“the oil story this time looks very different: this time, the signature of large-scale speculation is clearly visible”
And btw, if you’re right…hooray for speculators. but, what are the implications if your stance proves to be wrong? pascal’s wager certainly applies here, given how every single person on this planet is negatively effected by unnecessarily high commodity prices. “evil speculators” are not worth defending. trust me.
Seriously, you should think about a new job if you are going to support the mega investment banks, hedge funds and pension funds instead of people who read your paper and may have to choose between heat and food again if these parasites get their way like they did last winter.
Nice hyperbolic comment. I am sure it was peruasive. Rather than ranting, you may want to argue based on facts.
Seriously Gil, you should think about obtaining an economics and finance degree if you’re going to opine on commodity market trading. Because you have no clue what you are writing about. BTW Gil, all you need to do is buy Exxon/Mobil, Conoco/Phillips, etc. if you’d like to realize wealth gains. But you can also choose to be poor if liberal politics is the reasoning behind your financial management decisions.
Perhaps you need to look into the subject a bit further. Having worked in the oil and gas business for 34 years and traded in natural gas since the markets inception on NYMEX, you couldn’t be further from the truth. A source other than Barclays or any of the vested interest financials,ETF’s, etc. would be a good start, but I am sure that type of data is significantly overwhelmed by the largest lobby group in Washington wanting things to stay the same. How about looking at the huge short position in natural gas that is now NOT held by physical traders, or how an ETF like UNG is able to move the market 10%+ in a day with a roll of its speculative positions, oil or gas, spread or otherwise? Look at the price movement in natural gas just this week. This is not physical trader action. This is pure technical, speculative trade. If you don’t think last year’s rise to $147 oil or $15 natural gas, (especially natural gas knowing the fundamentals) was not speculative, one has to question your investigative and full disclosure skills. Position limits, effective daily price trade caps,and fewer hedge funds would be welcomed on the physical side to bring greater stability for exploration and end-use financial planning. I for one say thanks for any help CFTC.
Here’s a quick explanation of how high prices on futures contracts help to assure a supply of oil in the future and provide protection against price shocks that could result from a cutoff of supplies of foreign oil as occurred in 1973.
If I’m a “greedy” producer of oil, I have the choice of maximizing my profits by selling oil at the current price, or stockpiling it in some fashion for sale in the future. If the price of futures contracts is high enough, it gives me the incentive to (a) build and fill storage tanks, and/or develop more drilling capacity, but not yet use it, and (b) enter into futures contracts to sell my oil at a future price that will guarantee me a profit. The futures market thereby helps to insure that more oil is being made available for future use.
If, in the near future, some country such as Venezuela, Russia, Iran, or (heaven forbid) even Canada decides to cut off its oil to world markets, the price will rise, but that will then cause those “greedy” oil barons to release some of their oil from storage, both above ground and below ground. That increased supply from domestic sources will make oil physically available at a price below that which would otherwise be truly astronomical. And this would occur without the need for the federal government to release oil from the strategic reserve, which should be reserved for its original intent of supplying the armed forces in a war.
People like me who understand economics are generally sufficiently wealthy that we could get by with a big increase in the price of oil. The people who don’t understand economics are generally less wealthy and suffer the most from the economic demagoguery that they often support politically. And uninformed attacks on relatively minor imperfections in futures markets fall into that category.
WOW, there are a lot of experts on commodities out there!! Seems to me if we put the blame on the ’speculators’ for the $4.00 per gallon gas, we also have to blame them for the $2.17 I paid yesterday. Now if those out there are wanting a return to the 23.9 cents I paid in 1968………well, you are either nuts or stupid……..and likely both! Folks, its is called ‘markets’ for a reason and history shows that regulation and greed both have the same father.