Can you imagine having control of nearly $8 billion worth of oil – over three times the amount of oil that the United States consumes daily? One trader knew that feeling this year, as a single energy company held 11 percent of all contracts on the New York Mercantile Exchange at one point last month. Vitol Group is a Swiss energy company which was identified as the controlling entity, and the Commodity Futures Trading Commission [CFTC] reported that the company would be best described as a speculator in the energy markets.
As oil prices rose dramatically during the first half of this year, congressional leaders, economists, and business leaders from across the country were quick to blame speculators in the energy futures market as the cause for the price appreciation. As the price of oil has dropped over the past two months, the debate over speculators potential influence in energy markets has also diminished. The news of Vitol Group controlling a large number of contracts brings back this debate, as a single energy company accountable for speculative bets in the market, was responsible for a large controlling stake in the oil futures market.
Vitol has amassed futures contracts equal to 57.7 million barrels of oil by June 6, valuing the holdings at nearly $8 billion that day. Regulators believed that the Swiss energy company's role in the markets consisted of assisting industrial companies in acquiring the oil they needed. The report by the CFTC however, stated that Vitol Group would be best described as a speculator, or one who was mainly concerned with making profits through the trading of contracts, rather than from assisting companies in the delivery of contracts.
The CFTC's report did not include the amount of capital which was used as collateral for Vitol's contracts. The Nymex allows traders to purchase contracts using margin, or by borrowing funds to use in the purchase of contracts. The amount of collateral which is needed to purchase contracts, or the margin requirement, is sometimes as low as 10%. This is compared to a much higher initial margin requirement of 50% for equities.
The move in oil markets over the past year has represented fundamental changes in the supply and demand for crude oil. Price appreciation of oil during the past three years has been the effect of large increases in demand from global expansion and similarly, demand destruction as the result of high oil prices led to price depreciation in the past two months. Conversely, speculators have had an increasing role in the energy market's moves, exacerbating price movements in both directions.
