The role of speculation in energy markets has flared up again. Earlier this month, Joseph P. Kennedy II, former U.S. Congressman from Massachusetts, made the following statements,
But there are factors contributing to the high price of oil that we can do something about. Chief among them is the effect of “pure” speculators — investors who buy and sell oil futures but never take physical possession of actual barrels of oil. These middlemen add little value and lots of cost as they bid up the price of oil in pursuit of financial gain. They should be banned from the world’s commodity exchanges, which could drive down the price of oil by as much as 40 percent and the price of gasoline by as much as $1 a gallon.
Just last week, President Obama stated,
Rising gas prices means a rough ride for a lot of families. We can't afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.
As part of his crackdown on speculators in energy markets, the President proposed increasing penalties for market manipulation and increasing oversight of U.S. energy markets.
The debate over the impact of speculation in commodity markets has been roiling ever since crude oil prices spiked to new all-time highs in the summer of 2008. In a June 2011 post we examined this issue and reported that statistical tests generally fail to show a relationship between speculative positions and commodity futures price movements.
We revisit the controversy in today’s post, focusing on some recent data for energy futures prices and positions held by commodity index funds. While there is some discussion about exactly which type of “speculator” is supposedly causing the problem, there is little doubt that long-only commodity index funds have been at the center of recent controversies. In short, a tidal wave of investment in commodity index funds is purported to have overwhelmed the normal functioning of commodity futures markets, most notably crude oil.
Figures 1 and 2 show the movement of futures prices and commodity index positions in crude oil and natural gas, respectively, for a recent six-month interval (September 2011 to the end of February 2012). The futures price data reflect the nearby futures prices for New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) crude oil futures and NYMEX natural gas futures. The positions held by index investors are those reported by the Commodity Futures Trading Commission (CFTC) in their Index Investment Data (IID) report.