NYMEX: Speculators Aren't Driving Oil Market 25 comments
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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
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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?
Large speculators were net long in oil 53,311 contracts as of the most recent report (April 29, 2008). www.cftc.gov/dea/futur...
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/p.... 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/.../@newsroom/documents/s...
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?
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.
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.
"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.co...
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.
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.
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.