Since roughly February, a solid minority of commentarors, including this blogger, have questioned the thesis that the rapid increase in oil prices was solely the function of supply and demand. It was disconcerting to see what reactions this stance elicited. There was often an unwillingness to read what was written, and instead turn the post into an exercise in projection. Use of the word “speculator” is taken to mean the author 1. thinks speculation is bad (no, depends on circumstances), 2. is economically illiterate and 3. is a Peak Oil denier (a lot of vitriol here).
When oil sprinted to its $147 a barrel summit, there was plenty of commentary supporting the price as a function of fundamentals (despite quite a few oil company presidents and industry greybeards begging to differ), save some short-covering when the price rose above $140. But when I came back from Alaska and prices were continuing to fall, the explanations had at least as much to do with, um, speculative factors, like investors dumping oil and commodities for the dollar, as demand destruction.
It seems ironic that now that prices are falling, the CFTC has reclassified its data to show that some traders on exchanges that were previously designated as commercial are now classified as “non-commericial”. The role of weight of non-traditional money in the market now lends support to the notion that demand from new players looking for an inflation hedge or simply participation in a different asset class played a role in the sudden price move.
From the Wall Street Journal:
Last month, the main U.S. regulator of commodities trading, the Commodity Futures Trading Commission, reclassified a large unidentified oil trader as a “noncommercial” speculator….
Four Democratic senators on Thursday called for an internal CFTC inspector-general investigation into the timing of a July 22 release of a report led by the agency. That report concluded speculators weren’t “systematically” driving oil prices. Oil prices soared until mid-July before beginning a decline.
A letter by the senators asks why the report was released before full reviews could take place of trader information the agency only asked for this summer. Also at issue is whether the report played down speculators’ influence, notwithstanding the report’s finding that “the positions of non-commercial traders in general, and hedge funds in particular, often move in the same direction as prices.”….
Meanwhile, a debate is erupting within the agency….. about what the agency does and does not know about participants in this market. …..
Lehman Brothers analysts say the CFTC data, as they are now reported, fail to distinguish certain categories of financial traders from commercial traders and create “an opportunity for the activity of less-informed, purely financial investors to distort expectations.”
In recent months, legislators in Congress have demanded insight….In response, the CFTC has been collecting more data. It has pledged to report back to Congress by Sept. 15….
The CFTC is a few weeks into sorting a massive amount of data requested in June from Wall Street firms, and it is requesting additional data.