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Speculators are often (wrongly) blamed for high commodity prices. There is an easy way to assess the influence of speculators on commodity prices using the weekly Commitment of Traders (COT) reports. These reports contain information on the positioning of commercial and non-commercial (or “speculative”) traders on futures markets.
The distinction between commercial and non-commercial traders is probably not perfect, and, for each commodity, the COT report only measures the positioning on one single futures exchange (there are many other exchanges and financial instruments to speculate on a commodity). The COT positions thus do not represent the totality of all speculative forces. However, they are probably correlated with the totality of all speculative forces and can thus serve as an indicator.
A scatter plot of oil prices and net long positions of speculators reveals some interesting things:
First, net positions of speculators and oil prices are indeed correlated at higher frequencies. For illustration purposes, the last three big swings in oil prices and net commercial positions are highlighted in different colours: red (from $53 in November 05 to $71 in May 06), green (from $71 in May 06 to $51 in January 07) and blue (from $51 in January 07 to $75 in July 07). Speculation can thus be linked to price movements of around 30 weeks and 20$ per barrel (from high to low). Assuming that the equilibrium prices were between the observed highs and lows, speculation is associated with price divergences from the equilibrium price of around 15 weeks and $10 per barrel. The $10 estimate is an upper limit to the true effect of speculation, as it is not clear at all that it is indeed speculation which drives oil prices (and not oil prices driving speculation).
Second, in the longer run, speculators do not affect the price of oil. This is not only visible from the chart, but also follows from the fact that speculators neither consume nor produce oil and thus do not influence physical demand nor physical supply of oil, which, ultimately, determine oil prices.
Third, the current period of high oil prices does not seem to be caused by speculators, as net positions of speculators are not overextended. A pick-up in speculative activity could potentially add another $5-10 per barrel. High oil prices in the past month rather seem to be due to another upward shift of the oil price, probably related to the depreciation of the US dollar.
Source: www.economicreason.com
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