Leading up to 2008, oil prices experienced a steady, upward trend. Then, in 2008 oil prices climbed to unprecedented highs of $147 per barrel in July, only to fall dramatically in a very short period of time to a low of $30 per barrel in December 2008. Since the end of 2008, oil prices have risen in 2009 and are now near $70 per barrel. The relatively recent dramatic movement in oil price has caused everyone from U.S. congressmen to ministers from the Organization of the Petroleum Exporting Countries (OPEC) to call into question the role of speculative traders in the crude oil market.
The Commodity Futures Trading Commission (CFTC), the main regulator of U.S. oil futures markets, recently announced that a new review of the role of speculators in oil futures markets trading would be forthcoming in late August. Early reports indicate that the CFTC, in its new study, is likely to pin oil price swings more squarely on speculative index trading. The Obama administration has already indicated that it will pursue greater regulation of the market and is negotiating with the United Kingdom about possible coordination.
While the question of what has produced sharp swings in oil prices since 2005 is a complex one that requires further and deeper study, there are inescapable facts that need to be part of the
debate about regulating the activities of institutions betting on movements in oil price purely for financial gain.2 Specifically, noncommercial traders—who the CFTC designates as any reportable trader who is not using futures contracts to hedge—have increased their footprint in the marketplace dramatically since the late 1990s.
Hedgers are typically producers and consumers of the physical commodity who use futures markets to offset price risk. By contrast, noncommercial traders seek profits by taking market positions to gain from changes in the commodity price, but are not involved in the physical receipt/delivery of the commodity. These financial players—generally referred to as “speculators”—have come to account for a significantly greater proportion of activity in the U.S. oil futures markets than physical players in the oil industry in recent years. In addition, trading strategies of some financial players in oil appear to be influencing the correlation between the value of the U.S. dollar and the price of oil.
Moreover, we contend that the observed trading behaviors were supported during the 2000s by the policies surrounding the way governments approached the use of strategic government oil stocks.
This brief paper investigates the composition of traders in the oil futures market and how this composition has changed in recent years. We also elucidate new trends in financial currency and commodity price movements and quantify dramatic changes in dollar-oil correlations.
Specifically, we address the core questions of whether speculative trading in oil has increased and whether the link between dollar and oil-related financial contracts has strengthened in the last several years. Finally, we discuss the interaction between these observed market trends and policies regarding the use of strategic government-held oil stocks.
Download
Who Is In the Oil Futures Market and How Has It Changed?
