Useful Perspective on Speculation in Oil Markets

Michael Giberson

Geoffrey Styles offers some perspective on the Vitol S.A. affair. (Vitol was indirectly revealed to have had a rather large position in NYMEX’s oil contracts when the CFTC reclassified a single trader from “commercial” to “non-commercial.” The CFTC did not name Vitol, but enough information was available that industry insiders were able to discern the company involved.) According to the Washington Post, Vitol held approximately 11 percent of outstanding contracts in the market.

The Washington Post headlined its report online: “A Few Speculators Dominate Vast Market for Oil Trading.” But, as Tyler Cowen remarks, “influence” may be a better choice of words than “dominate.”

I recall that folks said that Amaranth dominated natural gas futures, too, and yet somehow all of their domination led to multi-billion dollar losses and the disbanding of the firm.

Anyway, if you’ve read some of the news reports about the CFTC reclassification, then you should also read Styles for a deeper perspective on the news.

UPDATE: NewsWatch: Energy also has comments.

STILL MORE: Bloomberg reports that the CFTC disputes the Washington Post‘s claim that “financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX.” Accorder to the Bloomberg article:

The agency said the 81 percent figure cited in the Post story seems to count an entire group of traders, those labeled “swaps dealers,” as speculators even though some of them are engaged in hedging for commercial entities.

(The Styles piece found via The Energy Collective.)