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Price relationships in crude oil futures: new evidence from CFTC disaggregated data

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Abstract

This paper attempts to reconcile two strands of literature on oil and speculation: one that posits the predominance of supply/demand fundamentals, and one that investigates the hypothesis of speculative trading. To do so, we develop a Markov switching analysis based on the WTI crude oil futures price, CFTC disaggregated data, and fundamentals of the oil price. The benefits of this approach are twofold: (1) the model is able to track changes in the underlying business cycle, and (2) the model explicitly incorporates data on the net positions of money managers as a proxy for speculative activity. After verifying the sensitivity of our results to the inclusion of supply and demand factors on the oil market, we cannot eliminate statistically the possibility of speculation among the main reasons behind the 2008 oil price swing. We also explicitly recognize the influence of many other economic variables during that specific time period.

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Notes

  1. Note that the futures data are probably an underestimate, since they do not include options or over-the-counter trades. Furthermore, it is important to note that major oil producers, like Saudi Arabia and the other OPEC countries, deal only in the spot market and not in the futures market.

  2. So far, futures exchanges themselves, principally NYMEX, have been allowed to set their own limits.

  3. Processors and merchants include traditional commercial users, processors and producers of the commodity who are actively engaged in the physical markets, and are using the futures to hedge the associated price risk.

  4. Swap dealers are traders who deal primarily in swaps and hedge those transactions in the futures markets. A large portion of swap dealers’ trading represents commodity index investors and swap dealer positions are often used as a proxy for their activity.

  5. Other reportable agents might include large individual speculative traders or market-makers, as well as firms managing their own assets.

  6. Notably, a substantial portion of passive investors are known to gain desired exposures to commodities markets through swap dealers.

  7. The short-run price elasticity of demand is estimated to be less than −0.1 and the long-run price elasticity ranges between −0.2 and −0.3 (Hamilton 2009a).

  8. Total OPEC production rose steadily month by month from January through July 2008, and average daily production during these seven months was about 4 percent above the average daily production in 2007.

  9. These results are not reported here to conserve space, and may be obtained upon request.

  10. Usual unit root tests results (ADF, PP, KPSS) are not reproduced to conserve space, and may be obtained upon request.

  11. This estimation routine generates two by-products in the form of the regime and smoothed probabilities. Recall that the regime probability at time t is the probability that state t will operate at t, conditional on the information available upto t − 1. The other by-product is the smoothed probability, which is the probability of a particular state in operation at time t conditional on all information in the sample. The smooth probability allows the researcher to 'look back', and observe how regimes have evolved overtime (Fong and See 2002). Since both plots are similar, we only reproduce the smooth probability in the paper to conserve space.

  12. More details about the distributional characteristics for the Morkov-switching process, and further diagnostic tests regarding the symmetry of the Markov transition matrix and the simple nested null hypothesis that the data follow a geometric random walk with i.i.d. innovations may be obtained upon request to the authors.

  13. Note that we obtain qualitatively similar results by using the OPEC's crude oil and liquid fuels supply variable.

  14. Since this period, OPEC spare capacity has continuously risen: it has more than quadrupled by April 2009, largely due to the global economic downturn and steadily weaker demand.

  15. The S&P GSCI is one of the most widely tracked commodity indexes, and generally considered an industry benchmark. It is computed as a production-weighted average of the prices from 24 commodity futures markets with a relatively heavy weighting towards energy markets (Irwin and Sanders 2012).

  16. Recall that the smooth probability is the probability of a particular state in operation at time t conditional on all information in the sample. It allows the researcher to ‘look back’, and observe how regimes have evolved over time.

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Acknowledgments

The author wishes to thank for fruitful discussions anonymous referees and the Editor Prof. Shunsuke Managi, as well as Jean-Marie Chevalier, Michel Laffitte and the Members of the Working Group on the Volatility of Oil Prices—Frederic Baule, Frederic Lasserre, Ivan Odonnat, Edouard Viellefond—of which the Report Chevalier (2010) has been submitted to Christine Lagarde, French Minister of Economics, Industry and Employment on February 9, 2010. The author wishes to thank also the experts consulted during the preparation of the report at the IEA, the CFTC, the US Treasury, the US Department of State, the Federal Reserve, the EIA, the Congressional Research Service, the US Senate, the US Department of Energy, the CSIS, PFC Energy, the World Bank, the IMF, Deutsche Bank (Washington, DC USA) and the European Commission (DG MARKT, DG ECFIN, DG TREN (Brussels)): Didier Houssin, David Fyfe, Jacqueline Hamra Mesa, Robert Rosenfeld, Eric Juzenas, James Moser, Nela Richardson, Stephen Sherrod, Rafael Martinez, Gregory Kuserk, Jordon Grimm, Sandra Cvitan, Douglas Hengel, Roger Diwan, Trevor Reeve, Patricia White, Howard Gruenspecht, Bob Ryan, Robert Pirog, Rena Miller, Cory Claussen, Patrick McCarty, Mark Jickling, Carmen Difiglio, Guy Caruso, Adam Sieminski, George Kramer, Thomas Helbling, Matthew Jones, Randall Dodd, Ana Fiorella Carvajal, Paulo de Sa, Shane Streifel, Masami Kojima, Robert Bacon, Jean−Christophe Donnellier, Christophe Destais, Maxime Schenckery, Cameron Griffith, Jean−Guillaume Poulain, Roland Lhomme, Hannes Huhtaniemi, Alexandre Mathis, Peer Ritter, Joan Canton, Asa Johannesson Linden, Jan Panek, Eero Ailio, Klaus−Dietman Jacobi, Marcus Lippold, Malcolm Mcdowell, Zslot Tasnadi, Adam Szolyak. All errors and omissions remain by the author.

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  1. University Paris 8 Vincennes Saint−Denis (LED), 2 rue de la Liberté, 93526, Saint Denis Cedex, France

    Julien Chevallier

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Chevallier, J. Price relationships in crude oil futures: new evidence from CFTC disaggregated data. Environ Econ Policy Stud 15, 133–170 (2013). https://doi.org/10.1007/s10018-012-0045-3

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