WSJ.com reporter says more than half of traders in oil futures are speculators

http://www.businessword.com/index.php?/weblog/comments/2258/

Vitol Group, a big European commodities trader, has been reclassified by the Commodity Futures Trading Commission (CFTC) as a large oil futures speculator, Ann Davis reports at wsj.com.

Her impact graphs say that far more than half of the oil futures traders are speculators:

"in July, by changing the classification of a large oil trader from a commercial to a “noncommercial” trader, the U.S. Commodity Futures Trading Commission showed that noncommercial speculators represented half or more of all bets outstanding on the crude-oil benchmark traded at the New York Mercantile Exchangeup from about 38% before the restatement.

Combining these noncommercial traders with another category of financial investors brings the percentage of speculators in the oil market to far more than half of all trading. Last week, Democratic senators seeking to impose new restrictions on oil trading criticized the CFTC for playing down the importance of this revision at the same time that the agency was contending in a new report that speculators weren’t influencing oil prices."

That speculators are such big players in the oil futures market confirms that speculators have played big roles in inflating and then deflating oil prices.

Recently I've heard again and again that "the biggest investors in the oil industry are mutual funds" and similar instruments. I think that the claim is made to offset public outrage about astronomical profits at a time of record prices, but does it?

Is it true that mutual funds (and the like) are the industry's major investors? If so, is it relevant to the question of gouging/profiteering?

Sorry if this is the wrong place, but the topic resonates along the same lines, I thought.

since they are the biggest investors taken as a mass, they therefor are very big investors in oil companies.

Yeah, I think they are trying to tell people - "Well if you own mutual funds and your retirement money is invested in mutual funds you better be careful about hassling us oil companies. But most mutual funds (especially funds managing retirement plans investments are very widely distributed throughout the entire market. Only a portion is invested in oil companies.

The reason the oil companies are making windfall profits is they charge themselves the market price for crude oil (now driven by market traders) they take out of the ground and then that becomes the cost figure for their oil refining and distribution divisions. But this way their drilling and recovery divisions get to enjoy all the speculative gains that market speculators do.

Pretty neat, huh?

speculation in oil prices, that the price was strictly a supply/demand issue, then seeing Joe on CNBC's Squawk Box shortly afterward repeating Paulson's assertion as fact. :shrug: :P

http://www.opensecrets.org/industries/indus.php?ind=E01

very recently see http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=115x170726

"The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders."

"only after making an unusual request for data from the firm"

Yeah, right. the CFTC is supposed to be monitoring all the trading going on on the NYMEX. They knew Vitol was trading a helluva a lot of contracts. They now want to act like they just discovered it. BULLSHIT!


That 81% figure is referring to speculative buying. The trader had no interest in taking delivery of the commodity. They are just betting on the price and will sell out of their contracts (intending to make a profit) before the settlement (i.e. delivery) date.

here's some more from the article:

The biggest players on the commodity exchanges often operate as "swap dealers" who primarily invest on behalf of hedge funds, wealthy individuals and pension funds, allowing these investors to enjoy returns without having to buy an actual contract for oil or other goods. Some dealers also manage commodity trading for commercial firms.

To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC's purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn.


This situation is too much like 1929 for me.

thereby driving up the prices of almost everything required for others to just to live, i.e., the energy to fuel their homes and cars and the food they eat? :P

As they drive the price up, they simultaneously drive down demand (helping fight global warming) and make it more attractive to switch to alternative fuels. Thank god for speculators - without them we'd be stuck using oil forever!

1) If you are investing in a futures market, and you aren't a "speculator," then what are you?

2) My best guess at (1) is that there are speculators who are just chasing performance, and speculators who are engaged in purchasing oil for "legitimate" reasons, but what I'm curious about, is, if you take away these performance-chasers, how does one model the actual price impact? Does it move the market back across the line into "buyer's market?"

do buy (and sell) futures contracts as hedges against being burned by prices moving in the "wrong" direction (for their interests).


You need speculators willing to 'take the bet' say that prices may rise and are willing to take a contract for the delivery of let's say corn or wheat or oil, hoping he will make money on the rise in prices. Now, the producer of the commodity is afraid he might lose money if the price falls so he sells a contract to deliver a quantity of commodity in order to protect himself from that potential loss.

Processors who buy a raw material and produce a product from that commodity may buy futures contracts to protect themselves from a rise in the price of the raw material. If the price rises, his futures contracts gain in value offsetting the higher price he will now have to pay for the more expensive actual commodity.

You definitely need speculators, people who will gamble on a price change in order to make money, to give the producer the abililty to hedge against a loss. Sometimes farmers will sell their crop at the beginning of a season to get money to finance the planting. THis obviously helps the farmer. The usual practice is though, I believe, to get a loan from a bank. I think more often, farmers sell the contracts as the season progresses and the situation looks like there may be an oversupply of the grain they are going to harvest which will drive prices down. So to hedge against losing money the farmer may sell a contract to deliver a quantity of grain at a set price now, thinking the price may go down later, when he harvests.

The trouble is when too many are speculating on the price movement it makes prices very volatile and also causes prices to rise (before they come back down) causing many consumers of the final product (you and I) to spend much more for that item (food, gas) than we would have if there had have been an excess number of speculators driving prices up just because THEY were buying lots of futures contracts. They rather than demand from actual consumers drove up the price on speculation that the price would go up. Get enough speculators or big speculators and they will drive the price up themselves!

... but some are more equal than others ...
:shrug:

As someone said upthread, this reads as a CYA action by the oil industry
(and their trusty friends) as your definition in #1 is exactly right ...
the use of the word "trader" is an attempt to dampen criticism as it
implies that there are genuine products being exchanged for cash rather
than just the IOUs of greed-driven gamblers.