Don't blame the speculators

Speculators don’t appear to be behind the spike in oil prices in the summer of 2008, according to a new paper by EDHEC-Risk Management.

“Based on traditional speculative metrics, the balance of outright speculators in the U.S. oil futures and options markets was not excessive relative to hedging activity in those same markets from June 13, 2006, to Oct. 20, 2009,” author Hilary Till, research associate at EDHEC-Risk Institute and principal at investment and research firm Premia Capital Management, said in the paper, titled, “Has There Been Excessive Speculation in the U.S. Oil Futures Markets?”

Till did research in 2008 on the topic but used the data released in October — three years of enhanced market-participant data for 22 commodity futures markets — for the latest piece. The data allowed observers for the first time to distinguish between speculative position-taking and regular commercial hedging more easily.

“This new data is important because we can now evaluate whether the balance of outright position-taking in the U.S. exchange-traded oil derivatives markets has been excessive relative to hedging demand during the past three years.
Using this new data and with some notable caveats, one can conclude that speculative position-taking in the US oil futures markets does not appear excessive when compared to the scale of commercial hedging over the past three years. As noted in the paper, though, we have to be very careful on how strongly we state this conclusion. For example, we do not examine whether there was excessive speculation in the oil markets in other venues besides the US oil futures markets.

Ok, this isn’t the first time we’ve heard this. Even the CFTC concluded itself (twice) that it wasn’t speculators.
But Till argues there are still major improvements to be made in oil market data, like better future productive capacity estimates from key suppliers, “inventory statistics from important non-OECD consumers, and summary position data from over-the-counter (non-exchange-traded) derivatives participants.”

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