TTM Speculative Activity Actually Decreased on the NYMEX

Speaking of speculation, here is a quick tidbit from Bloomberg showing how hedge funds and other alleged “speculators” have pulled back from the energy markets significantly over the past year.

From Bloomberg:

NEW YORK/LONDON -- Hedge-fund managers and speculators reduced bets on higher oil prices by 80 percent since JULY as crude futures rose to records and U.S. regulators started investigating trading, government data show. 
 
So-called speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27 from a record 127,491 on July 31, according to a U.S. Commodity Futures Trading Commission [CFTC] report on May 30. 
 
The decline may complicate the CFTC's probe as regulators try to determine how much of the rise in oil to more than US$135 a barrel last month was caused by speculators who may have manipulated the market instead of consumer demand. 
 
The CFTC, under pressure from Congress, said May 29 it was investigating the doubling of oil prices the past year and said it will consider giving more detail on the types of oil investors and their holdings. 
 
"The real problem is with passive investors like pension funds and index traders, who do not really qualify as speculators because they're long term" holders of oil contracts, said Olivier Jakob, managing director of Petromatrix Gmbh, a consulting company in Zug, Switzerland. "There are no numbers on index traders, that's why the CFTC is going to ask for them and publish them." 

Now let’s look at the change in oil prices over the past year:

Image courtesy of the BBC

If speculators are truly the cause behind the sharp rise in oil prices, then why has the price of oil continued to increase as the level of speculative activity did the opposite? Could it be that the two are not related and the cause of the price increases truly is supply and demand?

Personally I don’t think the “anti-speculation” movement in Congress is going to go much of anywhere, and will probably turn into another Dog & Pony show like the hearings where they bring in the oil industry executives for their annual chiding.

E.g. it’s an election year better engage in some placebo activities to make the populace think that we’re doing something.

You can read the entire Bloomberg article here (“Hedge Funds Cut Oil Bets as Prices Robe, CFTC Probed” – Robert Tuttle and Grant Smith, June 2, 2008).

Acknowledgements: special thanks to “Jest” for bringing this to my attention.

Comments

[jjason:]

Speculation in commodity futures DOES affect the price of commodities.

My solution is Congress should require 100% margin and make everyone take delivery of the commodity.

This will drive speculators out of the futures markets ( in the US at least ). Then other countries, hopefully, will follow US policy because prices are too high.

We as consumers need to educate ourselves. Go to:

www.star-telegram.com/...

and

www.commerce.senate.go...

If you are angry about what a tank of gas costs you then DO SOMETHING ABOUT IT. READ THESE TWO LINKS.

THEN ASK CONGRESS TO FIX THE PROBLEM.

2008 Jun 27 08:35 AM

[GH:]

jjason,

You're exactly right.

Be aware that speculation on NYMEX has moved to the unregulated "London" ICE (actually run by a USA company and using terminals here in the USA) and greatly expanded. Those who put out "speculation is down" stories are at best being misled.

2008 Jun 27 09:05 AM

[CLH:]

jason---You are wrong. The high price is caused by the gov. not speculators. The gov. has lowered interest rates too much causing the demise of the dollar. At the same time these idiots have closed most land to drilling and now mining (uranium).

2008 Jun 27 09:10 AM

[mrhockey123:]

If you make margin 100* and make people take delivery, you will force a heck of a lot of liquidity out of the market. That might actually increase volatility.

2008 Jun 27 09:25 AM

[Mike K:]

Noncommercials are not counted as speculators formally, but they represent indexing fund interests (and probably even spec positions of investment banks as well). Basically this data is useless. The 'speculators' like the USO ETF are in the noncommercial side, I believe. Noncommercial open interest is up about 1m contracts over the last few years.

Distraction by bad statistics is ... well.... bad?

2008 Jun 27 10:15 AM

[mrhockey123:]

If they REALLY want to do something about food prices, they would kill the ethanol subsidies. Then maybe the USA can stop using 30% of its crop to make 3% of its fuel.

There's no political motivation to kill these subsidies though because, as one insightful article said, "US farmers vote - (people in third world countries who can no longer afford food) dont"

2008 Jun 27 11:02 AM

[jjason:]

CLH,

The lower interest rates are also part of the problem because the borrowed money is cheap. Therefore, it is less expensive to speculate.

Did you read the articles I mentioned?

2008 Jun 27 11:02 AM

[john s. gordon:]

jjason - right on.
> jack

2008 Jun 27 11:09 AM

[jjason:]

Mike K,

Anyone buying oil futures contracts and rolling the contracts over each month does more harm than good. These are the speculators I ( and others ) are talking about.

Let's solve one problem at a time.

I will not buy into commodities at all. I believe that only firms involved in producing a product for the consumer should be involved in commodities trading.

Phil Davis wrote an article this week on SeekingAlpha that gives a link to an article ( policy statement ) by Senator Barack Obama.

If Congress changes the laws properly ( and quickly ) we will all be better off for it. Professor Michael Greenberger's testimony is something you should read. The link is in my first comment.

2008 Jun 27 11:12 AM

[nakedjaybird:]

nakedjaybird
Jun 27 11:07 AM

Would NO LEVERAGE, MANDATORY DELIVERY AND 100% MARGINS prevented the:

- housing fiasco,
- subprime whatever,
- Wall Street bubbles,
- energy wheeling (can't remember the buzz word),
- savings and loan failures,
- and most "financial" excesses,
- including credit crunches??

Who regulates this stuff???? The real question is "who does not regulate this stuff??". Well, maybe the first question was correct!!!

2008 Jun 27 11:13 AM

[nakedjaybird:]

Jason - how could anyone making HUGE and MULTIPLE tank-fulls of money really care about what a tank-full of gas costs???

2008 Jun 27 11:16 AM

[Mike K:]

Jjason: Exactly. Already saw that testimony a week or two ago. The market has decoupled from fundamentals. No its a (fund)amental market.

2008 Jun 27 11:31 AM

[Brian Pursley:]

I've been posting that in the comments non stop for the past several days.

2008 Jun 27 01:32 PM

[sbenard:]

It constantly amazes me that regardless of how much data is collected that disproves the silly ideas of jjason and the other socialists (whose ideas above are obvious), these ideas continue to proliferate. Perhaps we SHOULD impose all sorts of onerous government impositions on the financial markets. Such ideas as these -- to anyone who really understands these markets -- are blatantly and obviously ridiculous. This idea of eliminating margins is one of those that is so absurd -- and the consequences so negative -- that any serious and informed person would reject them out of hand. If we embrace such impositions, then there will be consequences. They will be terrible.

Capital flight will be one. When $3 trillion of capital flight disposes of the dollar, then higher commodity prices will be the result. Hyperinflation may be the consequence. Remember the 570 points on the Dow futures during the MLK holiday? That was a $50 billion liquidation. What would happen when $3 flees the Dollar? Do you think that capital will stay where it is NOT welcome?

Oil from foreign nations that is unwelcome on these shores due to driving away the risk-takers in our society will find its way to places where it is more welcome. Shortages -- and much higher prices -- will be the result. Guaranteed.

Only two organizations have the data -- the CFTC, and the futures exchanges. Both are united -- and the data supports it -- that speculators are not the cause of high energy (and other commodity) prices. No one else has the data. This article presents just SOME off that data. The other data show what this article shows. But some minds are more closed to facts than a bear trap. They have made up their erroneous minds regardless of what the empirical evidence shows. If we ignore the data and act out of emotionalism and error, then we will bear the terrible consequences.

We'd better be careful what we wish for, because we may very well get it. The voices for tyranny are loudest during times of pain. "Put me (or my ideas) in control!" But the results are still tyrannical and destructive. The problem is that tyrant are never willing to relinquish power, no matter how destructive or often their ideas fail.

2008 Jun 27 07:50 PM

[sbenard:]

To those who think speculation is driving oil prices higher. Put your money where you mouth is. Buy one of the ETFs that SHORT oil. I suggest that you don't really believe your own arguments, until you are doing that.

If the Saudis or other OPEC ministers genuinely believed that oil prices are too high due to speculation, they could easily use their trillions of Dollars of oil wealth to SHORT the market. But they don't. Making silly arguments for government regulation is one thing, but NONE of these people really believe their arguments because they don't put up. I say it's time to SHUT up, because they have NO credibility.

2008 Jun 27 07:54 PM

[CLH:]

shenard---Very good. There is no hope for jjason. He has no understanding of our capitalistic society which he hates.

2008 Jun 28 06:47 PM