NYMEX: Speculators Aren't Driving Oil Market

By Brad Zigler

Democrats in the U.S. Senate are looking beyond a summer gasoline tax holiday to focus on broader oil market fundamentals. Yesterday, Senate Majority leader Harry Reid [D-Nev.] unveiled the Consumer-First Energy Act, which calls for a revocation of tax breaks to big oil companies, a windfall profit tax and a cap on additions to the government's Strategic Petroleum Reserve.

Included in the bill is a diktat to the Commodity Futures Trading Commission [CFTC] to substantially raise margin requirements for oil futures. That measure, say the bill's sponsors, would discourage excessive speculation which is blamed for fueling oil's meteoric price trajectory.

While corporate flacks at ExxonMobil and BP went into overdrive to deride the bill's tax provisions, the New York Mercantile Exchange took issue with the margin mandate.

Setting onerous margins would be counterproductive, says the exchange, for a number of reasons, not the least of which would be driving trading volume away from the NYMEX to "dark unregulated venues" and opaque offshore markets. Besides, says the bourse, speculators (read: "large non-commercial participants") haven't been that much of a factor in the current crude oil price run-up.

According to a NYMEX statement released yesterday, "The percentage of open interest in NYMEX crude oil futures held by non-commercial participants (relative to commercial participants) actually decreased over the last year even at the same time that prices were increasing."

NYMEX is disingenuous when it makes such a sweeping statement. According to the CFTC, noncommercials' net long position has risen since May 1, 2007, from 3.4% of crude oil open interest to 4.5%. At the same time, the net short exposure of commercial accounts (hedgers) rose from 3.2% to 3.9%. The market has, in reality, become "longer" because of speculators.

 

NYMEX Crude Oil Open Interest

 

That played out this week in a 10% surge in crude oil's price. Refining products gained on the week as well, but to a lesser extent. Both heating and unleaded gasoline futures were 9.2% higher for the seven-day period ending Wednesday.

As a result, refining margins fell to year-to-date lows. The November/December NYMEX crack spread now stands at $9.51 a barrel, or 7.8%. Margins narrowed 83 basis points (0.83%) over last week.

 

NYMEX Crude Oil Crack Spread

 

 

 

 

Comments

[Hemachandran Krishnan]

The move to put control on speculators is the right move. We do not want the already burdened consumers to pay a higher price for this reason. If oil companies are not investing a substantial portion of thier profits for more production and refining, revocation of the tax break should be the way to go. But use this money for the purpose you are punishing the oil companies for.

[ronrohkal]

Please help me here, all this talk about speculators driving price up makes NO sense to me. Crude oil is an actual physical commodity, if you buy crude you have to store it some where, the only entity that has the wherewithal to do so is the US govt.

A future contract is an intangible, it's only worth is based on the price underlying commodity. A corollary is a share future. How would the purchase of stock futures drive up the price of the stock?

[Ernie Montague]

it drives up prices because the party that has to deliver will start hedging as their contract price is left behind.

[jjason]

I am in favor of making oil futures illegal. I see no reason for having an oil futures market. But it is a start to increase margin requirements and have a windfall profits tax.

[Moe_Gamble]

This is complete b.s. You hand-picked dates to make a false case, and you are incompetent to write about commodity trading.

Large speculators were net long in oil 53,311 contracts as of the most recent report (April 29, 2008). www.cftc.gov/dea/futures/deanymesf.htm

Back on November 6, 2007, speculators were net long in oil 105,816 contracts.

So net spec longs have been dropping, not increasing, as the price has gone from the $90s to $125.

There have been numerous academic studies on whether speculators or herding behavior of any type are the reason behind the rising price in oil. They have unanimously concluded that there is no correlation whatsoever behind net speculative longs and oil prices. Nada. Zip. Speculators are just as likely to be short as long when oil prices are rising. Here is a 2007 study from the Oxford Institute for Energy Studies: www.oxfordenergy.org/pdfs/WPM32.pdf . If you look at the chart on p. 33, you can see quickly and easily that there is no correlation whatsoever between rising oil prices and speculators' positions.

The April 3, 2008 senate testimony of the chief economist of the CFTC provides further data that shows that speculator positions have no correlation whatsoever with rising oil prices, and are not responsible for rising oil prices: www.cftc.gov/stellent/groups/public /@newsroom/documents/speechandtestimony/...

Even the data for the dates you provide is misleading. It doesn't matter that speculative long interest has risen since May of 2007, because speculative short interest has risen as well. Speculators were NET long 55,998 contracts in oil on May 8, 2007. Speculators are LESS net long now than they were a year ago.

This kind of clueless commentary does nothing to help investors or this society deal with the current imbalances between energy supply and demand. How can this web site publish such clueless reporting?

[Oil Barron]

I urge speculators to continue to drive up the price of oil. We must reign in and CONTROL the nation that use the most energy. They deplete the world of recourses as well pump huge amounts of emissions into the atmosphere. They fell that is is they're right to use our global resources as they see fit.
It is up to the investors to put them in their place.
If this puts profit in your pockets at the same time, all the better. We absolutely must make the point that their usage is unacceptable.We also need to keep them from using alcohol based fuels as they are a poor substitute for fuel because of lower mileage yields.The biggest thing that we have to make clear to these nations is that we can control their economies!
WE HAVE THE POWER!!! POWER is what these nations understand.

[Oil Barron]

I urge speculators to continue to drive up the price of oil. We must reign in and CONTROL the nation that use the most energy. They deplete the world of recourses as well pump huge amounts of emissions into the atmosphere. They fell that is is they're right to use our global resources as they see fit.
It is up to the investors to put them in their place.
If this puts profit in your pockets at the same time, all the better. We absolutely must make the point that their usage is unacceptable.We also need to keep them from using alcohol based fuels as they are a poor substitute for fuel because of lower mileage yields.The biggest thing that we have to make clear to these nations is that we can control their economies!
WE HAVE THE POWER!!! POWER is what these nations understand.

[paulk8756]

Here's the D Congress again, once more missing the point about energy prices. They THEMSELVES are more to blame for the sky high price of oil than any other entity on EARTH. 85% of offshore U.S. oil and gas is out of bounds, ANWR's closed, nuclear's frozen and clean coal and oil shale are but a dream thanks to them. I hope you like the R's, because when the public finally figures this out they're going to be running things again.

[Caribou]

www.pkverlegerllc.com/PEM-WEB.PDF

"This issue of The Petroleum Economics Monthly begins with a short discussion of the difference between this commodity price cycle and the six earlier cycles noted since 1970 ... [they] suggest that the current price rise is being driven by cash from investors, not market tightness."

"...half to three-quarters of all commercial long positions in agricultural commodities are now held by “index funds,” the term used to describe investors who take and hold long-term positions in commodities."

"The phenomenon is quantified for agricultural futures because CFTC data provide hard information on activity. It is extended here to energy..."

"Calculations presented in the third section of this report suggest that up to three-quarters of the long-side positions in the WTI crude contract may now be held by such investors. This conclusion has important implications for the future trend in oil prices."

"The analysis presented here also suggests that “speculators” as traditionally defined play a
relatively small role on the long side of the market but may play a larger role on the short side
(betting on price falls). If this conclusion is correct (and it is supported by detailed information
from CFTC reports on the agricultural market), then one can conclude that efforts to push speculators
from the market will lead to an increase, not a decrease in prices."


www.nakedcapitalism.com/2008/05/is-commo...

[meh]

NYMEX: Speculators Aren't Driving Oil Market, what a load of crock, good job hiring reporters to lie. there's no reason for oil to go up, only reason it's going up is to fatten pockets of investors and oil companies. while everyone has to pay the price

[bearfund]

At some point you have to either sell your futures contract or take delivery. Since we can assume speculators aren't taking delivery, where are the giant blowoffs in contracts approaching expiry as speculators roll over and can find no physical buyers willing to pay the supposedly speculation-driven ask? I could much more easily believe that oil producers are, for their own individual (not collective) benefit, hoarding their own product, secure in the knowledge that the most money will be made by selling less oil for more years. But that doesn't really jibe with $600,000 day rates for jackup rigs, so I'm kind of forced to accept that basic supply and demand are the primary factors at work.

[Aurelien]

The only reason anyone has to pay the price is because they chose to buy that 8 MPG Hummer to look cool instead of getting a car with decent gas milage. Long term, high gas prices are the best thing for everyone as it will hasten a move to more renewable sources of energy.

[agiachic]

We need to drill holes anywhere and everywhere we can to find oil. What the hell have the polar bears ever done for me anyway? Build nuclear power plants and make the liberal Democrat environmentalists deliver the nuke fule with their bare hands.

[wayneS]

Where are the tax breaks that "Big Oil" supposedly gets? Last year the top three U.S. oil companies made $71 billion in profit. They paid $169 billion in taxes. There are over 500 oil companies in the U.S. Is congress trying to balance the budget by stealing from these American companies while continuing to raise the trade deficit.

[Vikram]

Moe Gamble:
1. The British study you posted has a graph on page 37, which shows massive swings in speculative long positions as the oil prices go up and down, with almost 1 to 1 correlation with oil price movement (Figure 4: IMF graph).

2. The amount of speculative money has increased substantially over the past year as long only commodity ETFs have poured cash into the commodity futures market. The price is determined by the marginal buyer and the speculators can drive the marignal price very high.

ronrhokal:

You can just roll over your future contracts to the next month. Plus there are also cash settled contracts where you do not take delivery of physical commodity but get settled based on what the physical contract is trading.

Futures speculation can contribute to immense volatility in essential commodities; that is why the Indian government has actually halted trading in food futures. Speculators can take food prices through the roof and cause massive disruptions.

[Commodity Bubble Proponent]

Of course the NYMEX is against raising margin requirements....do you all want to know WHY?

They don't give a rats-ass about the price (high or low), all they care about is the volume of these ridiculous paper oil contracts. If margin requirements were doubled, tripled, whatever, that would mean less oil futures trading and less PROFIT for the NYMEX.

It's in NYMEX's interest to have everyone DO NOTHING. That means lower interest rates, more commodity contracts, and more net profits.

[robc]

A report I heard yesterday said that 95% of all futures contracts aren't by actual end users. Futures buyers can buy on margin of as little as 5%. I thought that buying anything with those kind of margins ended with the great depression. The Dems have controlled the congress for less than a year and half and any attempts to undo the Bush admistration's messes have been vetoed or filibustered. The republicans had complete control of both houses of Congress for 6 years and our country is in the worst shape since the 1930's. We give the oil companies tax breaks, they have record profits and spend most of it buying back shares instead of exploring new sources, researching alternative fuels etc.. All the while selling distillates to foreign countries while our truckers pay record prices on diesel. The greed that controls our economy is mind blowing.

[Pissed]

This is absolutely BS. Oil is killing us. Iran is threatening Israel with nukes. Iraq is producing oil by the bucketfuls. We the taxpayers are spending billions GIVING Iraqis democracy. Our economy is falling of a cliff. We cant drive our cars, fly our planes, take a vacation, accumulate savings, nothing....Shrinking economies of scale are going to absolutely devastate our standard of living.

I am damn tired of it. Guam, PuertoRico are territories and Hawaii was recently a territory. Our military is in place in Iraq. It's time to take Iraq. Unilaterally declare it as a territory. Nationalize the oil. Put a crushing stop to the violence. Impose stability, the rule of law, and a government.

It will help with our standard of living and Iran will be forced to cool it's jets. You can have your ethics, I want a standard of living worth living.

[Ronfh]

paulk8756, the Rs were in control of Congress for years. How many offshore and ANWR acres did the Rs open up when they were in control?

[drooyrich]

americans, start selling your SUVs and buy fuel efficient cars (not hte Toyota Hybrids which in fact have a very negative life cycle, worse than a Hummer) - understand that there are no dark speculators driving the price of oil up - it is based on demand which is growing and projected to arrive at 120 million barrels PER DAY while we are stuck since 2005 with an 85 million barrel output - GOT IT ?? Slow down your air conditioning, no need to have freezing temperatures at home, you just need a couple of degrees less to have comfort - get ride of Suburbia model of life NOW - you are all doomed unless of course good old president invades Iran and secures supply by WAR (remember Iraq? why do you think you invaded it ? to free the curds and the shiites from Saddam ? yeehh

[CrossingtheT]

Do You 'anti-speculative' people up there, ask your broker: Dude, what is the real price for that stock? You know, without the speculation.

Do You ask the fella from the grocery store: Dude, what is the real price of that gallon of milk over there? You know, without your cut, and the wholesale guys cut and the farmers cut.

YOU WANT TO BUY OIL? THAN PAY THE PRICE ON THE PRICE TAG!
YOU THINK IT IS TOO EXPENSIVE? THEN DON'T BUY IT!

Vikram: You are correct, we ship a fortune over seas for oil.

And you get the greatest natural resource in history for that. That is a fair deal.

You don't want ship a fortune overseas? Don't buy their oil!

Oil producers, where ever they are, provide the most important product there is. The very foundation of our civilization.

IF YOU WONNA HAVE IT, YOU'RE GONNA THE PAY FOR IT!

YOU DON'T LIKE THE COUNTRIES OIL COMES FROM?

THEN DON'T BUY IT!

[TexVet]

Iran, Russia, and many in OPEC are declared enemies of the
the american consumer. I have not seen many comments about
the large soverign funds that benefit from high oil prices.
From 1990 to now; Many do and did not think we
were at war. But the enemy was attacking. You would think
Harry Reid or Nancy Pelosi could have one hearing on external
manipulation of price of oil.

[Canuck Investor]

Speculators have little to no effect on the price of oil. The price is determined by supply and demand. It's called the market mechanism. Does anyone believe the Saudis when they say the rise in price is caused by speculators and there's plenty of oil in the market?