The Role of Speculators on Oil Futures

by Russ Buchanan

At first, no one was really sure whether speculators were to blame for the rising prices of energy commodities and resultant spikes in gasoline prices. After all, there were other villains, such as unprecedented demand from emerging economies and instability in oil-producing countries. However, as prices and supply soared to record levels and analysts attempted to find out why the law of supply and demand no longer applied, it became increasingly clear that Americans who had been blaming speculators for their pain at the pump had been right all along.


A 2006 Senate investigation and report on speculators' impact on oil and gas prices found that the increase in speculators' purchases of longer-term contracts drove the prices of those contracts substantially higher than shorter-term contracts. This gave a financial incentive to oil companies and refineries to purchase even more oil to keep in their inventories for a longer period. As the report pointed out, if the per-barrel price of oil was $70 that day, the oil companies would be happy to sell it in a year for $75.

Faulty Studies

The report also found fault with studies that had minimized the impact of increased speculation on oil prices. Although studies conducted by the New York Mercantile Exchange (NYMEX) and Commodity Futures Trading Commission (CFTC) found little impact from the tens of billions injected into oil and gas futures by hedge funds and commodity pool operators, the report suggests both studies focused too narrowly on the effects of shorter-term contracts while ignoring the price run-up in longer-term contracts. Also, the studies' analysis of only certain months prevented them from seeing the total picture.

Pricey Glut and a Cure

In 2005, oil companies' inventories were at a six-year high; OPEC was producing more oil than it had in decades and, even after taking into account China's insatiable thirst for oil, production was far outpacing global demand for the stuff. According to a 2005 Fox News article by well-known financial writer Mike Norman, the only possible explanation for oil's soaring price was speculative demand. To lessen the number of oil speculators, Norman suggested that the NYMEX increase margins on oil futures. With investors able to control $67,000 worth of oil futures for a mere $3,375 -- as 2005's margins allowed -- it was no wonder that so many investors turned to oil.

Potential for Calamity

According to CNN/Money, large trading firms had twice as many long contracts (contracts speculating on price increases) in 2011 as they did in 2008, when oil peaked at $147 per barrel, and soon after, added record high gasoline prices to the worries of the already burdened American consumer. As the article points out, the upward pressure on prices caused by increases in speculation may enrich a few of the large speculators, but the corresponding increase in gas prices, which generally occurs three- to four-quarters after surges in futures prices, can be injurious to a healthy economy and devastating to a sickly one.

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