Oil Speculation

OIL SPECULATION….Was the recent spectacular rise, and subsequent fall, in oil prices driven by speculation? In June I admitted that “the huge increase over the past five months has had a bit of a bubbly feel to it,” but I didn’t really have any evidence to back that up. In July I linked to a report from the CFTC, the body that regulates oil futures trading, which said that prices were up because of supply constraints, not speculation. In August, a “quiet data revision” suggested that maybe the CFTC ought to change its mind about that. And finally, today, thanks to David Cho of the Washington Post, the other shoe dropped:

Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

….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.

Read the whole thing for more. This still isn’t conclusive evidence one way or the other, but it’s certainly suggestive that there have been a few big financial players helping to drive prices up in the past few months. Supply constraints are still the main culprit for long-term price increases, but all the same it’s beginning to look like it wouldn’t hurt to tighten up the oversight of the oil futures market a wee bit.