Oil speculators: a question of data

The Chronicle’s David Ivanovich reported today about concerns lawmakers have about the quality of the data the Commodity Futures Trading Commission compiles on oil trading and how that data was used in a recent report.

“In a letter to Inspector General A. Roy Lavik, the lawmakers raised questions about a July 22 interim report, in which an interagency task force found that fundamental supply and demand factors — not speculators — were the chief reason oil prices had spiked.”

In fact CFTC staffers determined on July 18, four days before the report’s release, that speculators played a larger role in oil trading than they had realized.
The CFTC reclassified a oil trader that had been considered a commercial trader (meaning they just traded to meet physical supply/demand or to hedge their physical supplies) as a speculative trader.
What did that little change mean? That speculators controlled 48 percent of the open interest in NYMEX crude oil futures and options as of July 15 — compared with just over 38 percent under the previous classification.
(We blogged about analyst Robert McCullough’s notice of this fact previously . Legislation is being proposed to address the data issue. Here’s the W$J’s take on the same story from today.)
Many industry experts have claimed (repeatedly) that speculators are not the primary cause of high oil prices, that at the root of the issue it’s still supply and demand. University of Houston professor Craig Pirrong discusses that here and many other places on his blog.
But the size of speculators’ stake in oil futures surprised many, particularly since such a huge change happened with the reclassification of just one trader. (Who that is isn’t clear, but many speculate it’s Semgroup, the now-bankrupt oil trader and logistics firm).
“That’s huge when you look at the numbers,” Phil Flynn of Alaron Trading in Chicago told Reuters recently. “It changes the whole way you look at the recent moves in this market.”
In a recent report Lehman Brothers commodity analysts Daniel Ahn and Brendan Fogarty also expressed surprise at the size of the position held by a single trader (but they concluded the reclassification did not seem to be the cause of the recent drop in oil prices from record highs).
At the heart of the issues is the Commitments of Traders report CFTC puts out each week. It’s supposed to reflect the positions traders (both commercial and speculative) hold in oil futures, but many say it’s a poor indicator, hard to read, easy to manipulate. Case in point: Enron, which has now been shown to be heavy in speculation, was classified as commercial.
So, take a look at the COT reports at the link above. Do they give you a clear view of what’s going on in the oil futures market?