New study on specs sheds little light

Throughout the battle over who or what caused crude oil to spike to $147 per barrel last year CME Group and Intercontinental Exchange (ICE) have consistently contended that despite the bluster from certain members of Congress and analysis of self appointed experts, there has been no empirical study that linked the spike to speculators or the positions held by commodity index funds.

 

Whether that claim can still be made or not is debatable as Rice University just released a paper calling previous Commodity Futures Trading Commission (CFTC) studies that showed excess speculation was not responsible, flawed.

 

But despite the excesses of some headline writers, the Rice paper is preliminary and does not offer any real evidence that speculators caused the spike; it basically offers some correlation studies showing growth in long open interest coincided with increased prices as well as showing an increase in the overall size of speculators as a percentage of market participants.

 

Not all of the analysis squares with the idea that speculators were a driver of price. Take a look at this chart inserted in the paper (The yellow bubble is ours but it shows that long open interest of non-commercials was shrinking—cut in half from its peak—when crude moved from $75 to the high of $147).

 

The study places responsibility for many of these structural changes on the Commodity Futures Modernization Act of 2000 but offers little to support this and fails to mention regulatory changes exempting financial hedgers from limits approved by the CFTC in 1991 that are probably more relevant.

 

It does talk about the increase negative correlation between crude oil and the dollar but attempts to make the case that increased prices in crude was the driver and now that negative correlation is a circle that feeds off of itself: Crude get more expensive, our trade deficit goes up, dollar weakens, crude oil goes higher and so on etc.

 

 To support this notion the paper states that the correlation developed in the last decade and shows how crude oil and the dollar were basically non-correlated the previous decade. One could argue there is a better argument that the anomaly goes back to the 1990s when many people believe the U.S. government received assurance form the Saudis that they would continue to pump oil despite low prices after the first Gulf War.

 

 Speaking of War, the paper does not mention the Iraq war, threats of a nuclear Iran or the exponential growth of China and India. To be fare the paper is titled "Who is in the Oil Futures Market and How has it Changed" not what caused crude oil to spike in 2008 but it clearly attempt to make that case. It even anticipates that the  CFTC will report speculation was responsible for higher prices, reversing the analysis of past studies, in a much anticipated report due to come out shortly.

 

 Whatever your point of view, this paper does not add any definitive proof to the argument that speculators caused crude oil to spike.

 

 

 

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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