By OGJ editors
HOUSTON, Dec. 7 -- As the US Congress and Commodity Futures Trading Commission consider tighter regulation of derivatives trading, a new study suggests excessive speculation wasn’t to blame for a record-breaking surge in oil prices in first-half 2008 (OGJ Online, Nov. 24, 2009).
The study by Hilary Till, research associate of the EDHEC-Risk Institute in Nice, France, uses newly detailed data from the CFTC and a traditional standard for assessing speculative activity in relation to hedging in agricultural derivatives markets.
“We can say that, based on traditional speculative metrics, the balance of outright speculators in the US oil futures and options markets was not excessive relative to hedging activity in those same markets from June 13, 2006, to Oct. 20, 2009,” concludes Till, a principal and cofounder of Premia Capital Management LLC based in Chicago.
She says her study became possible when the CTFC in October launched the Disaggregated Commitments of Traders report, which provided more detailed categorization of large traders than previously was available. The move relieved some of the ambiguity in the older reporting regime, which treated swaps dealers hedging their positions in futures markets as nonspeculative traders.
Because those dealers “are not hedging in the traditional sense of the word,” Till says, “it became difficult, strictly speaking, to understand the balance between (physical) commercial hedging in the futures markets and participation by those not involved in the handling of the physical commodity.”
Study method
Till applied a method for assessing speculation in agricultural futures markets developed by researchers at the University of Illinois at Urbana-Champaign. The researchers based their method on the “speculative T index” devised by economist Holbrook Working in 1960.
In Working’s view, commodity futures markets exist to provide the opportunity for hedging and risk management, with speculators importantly balancing positions of hedgers who are buying with those selling. Historically, Till says, speculation was insufficient to provide for commercial hedging needs in agricultural markets.
“The question now, especially in the oil markets, is whether the scales have not been tipped the other way,” she says. “If there is more speculation than is required for commercial hedging needs, a futures market becomes one of speculators trading with other speculators.”
According to the study, New York Mercantile Exchange futures markets for heating oil and gasoline are within a T-index range not considered excessively speculative for agricultural markets. The conclusion is the same for the Intercontinental Exchange West Texas Intermediate crude oil market for the brief period during which data are available.
For NYMEX crude oil markets, speculation isn’t excessive by agricultural standards when options and futures trading are combined, although indicated speculation increased from the summer of 2007 to the summer of 2008.
However, when options positions are excluded, futures-only oil trading on NYMEX is potentially excessive, Till says. And speculation indicators for agricultural markets might not be directly applicable to oil markets, she notes.
