CFTC: Speculators NOT Responsible for Run-Up of Crude Oil Prices

The CFTC released a report today, after a year-long investigation and data analysis, indicating that there is no evidence that speculators were the engine behind the run-up in crude oil prices this past spring and early summer. In fact, the report suggests that if anything, speculators are a moderating influence on higher prices.

While some may not want to accept the findings of the CFTC, and may even question their motives, the fact is that the CFTC, unlike Congress, has no agenda nor ax to grind. It is simply an independent regulator. It's five commissioners and chairman have 5-year appointments that are staggered so that they remain independent, and CFTC regulations require that no more than three can be of any one political party, so they have no reason to slant the report one direction of another. Furthermore, it was the CFTC staff the researched and prepared the report, not the commissioners themselves. The bottom line is that the facts and the data do not support the opinion that speculators drive the commodity markets. The full report can be found here:

Staff Report on Commodity Swap Dealers and Index Traders with Commission Recommendations

A Few Highlights from the Report

• The report indicated that speculative index funds represented only 17% of the total number of contracts traded in the commodity futures markets, of which approximately half were long, and half were short at any given time.
• Speculative funds represented a higher percentage of total contracts two years ago, before the current run-up in commodity prices. Speculators had decreased their presence during the period of time of great price escalation.
  
• For crude oil, speculative funds only represented 13% of the total! It is noteworthy that during the period of time when crude oil experienced its greatest price increases, the speculative traders were decreasing their size and presence in the commodity markets. During this time, speculators were scaling back their long trades, even while prices were advancing the most. This suggests that the presence of speculators held the price rises in check, rather than pushing them still higher!
• The number of net long crude oil contracts by speculators decreased by 45,000 contracts precisely during the time when crude oil prices reached their highest levels, from Dec '07 through June '08. Speculative interests in crude oil decreased by 11% precisely when crude oil prices were reaching their highest levels. Speculators were net sellers, not buyers, during this time! If anything, their influence would have been to push prices lower!
  
• It is also notable that the commodities (wheat) that had the largest notional value of speculative interest were the commodities that experienced that least increase in prices. While the price of wheat advanced, it didn't reach the record price territory that corn and soybeans achieved, despite the fact that nearly half of all wheat contracts were speculative at one point (47% at their peak). Speculative interests in corn was less than half of that of wheat (only 23% at peak), and yet prices for corn escalated much more rapidly than for wheat.
  

That's hardly a convincing argument for more regulation of the commodities markets, and only confirms earlier data that had previously been available. In fact, the results of the study would suggest that the best way to moderate and lower commodity prices is to increase the presence of speculators, because when speculators leave the markets, prices go much higher. Speculative influence in the markets tends to moderate prices spikes and drive prices lower, not higher!

The report is 71 pages, and is not light reading. I recommend it as an alternative for a sleep aid.