THE ROLES OF HEDGERS AND SPECULATORS IN THE NATURAL GAS AND CRUDE OIL MARKETS

1
THE ROLES OF HEDGERS AND SPECULATORS IN THE
NATURAL GAS AND CRUDE OIL MARKETS
Prof. Ronald D. Ripple Director, CREME Curtin
University
30th USAEE/IAEE North American Conference Washingt
on, D.C 11 October 2011
2

• Motivation
• Market and data
• What is excessive trading
• Open interest versus trading volume
• Index investment data
• Shares of trader categories
• Granger causality
• Conclusions

3

• Crude oil futures market - NYMEX
• Crude oil futures prices (NYMEX, CRB, EIA)
• Crude oil futures trading volumes (NYMEX, CRB)
• Crude oil futures open interest (NYMEX, CFTC)
• Time periods
• Prices January 2000 March 2011
• Trading volume January 2000 March 2011
• Open interest
• NYMEX January 2000 March 2011
• CFTC-Legacy January 2000 September 2011
• CFTC-Disaggregated June 2008 September 2011
• Index Investment Data Dec 2007 July 2011
  (periodic)

4

• CFTC-Legacy
• Commercial long and short
• Non-commercial long, short, and spread
• Non-reporting long and short
• CFTC-Disaggregated
• Producers-Merchants long and short
• Swap dealers long, short, and spread
• Managed money long, short, and spread
• Other reporters long, short, and spread
• Non-reporters long and short

5
(No Transcript)
6
(No Transcript)
7
(No Transcript)
8
(No Transcript)
9
Index Investment Data In US dollars and futures
equivalent contracts Includes index funds, swap
dealers, hedge funds, pension funds, and mutual
funds. Source CFTC Total notional value is
418.6 billion.
10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
Granger causality tests Following the approach
employed by Stoll and Whaley (2009), I first
estimate the relations between the change in
futures prices and its own lagged values. Then I
employ a variable-addition test of the lagged
values of changes in net open interest positions
one trader category at a time. Microfit
econometric software is employed. The
estimation is then reversed whereby the change in
net open interest positions is estimated against
its own lagged values, and then I perform the
variable-addition test of lagged values for
changes in the futures price. I also test for
Granger causality between categories of traders
(commercial versus non-commercial) testing for
the influence of lagged values in both
directions. None of the variables exhibit unit
roots. For example (SP is settlement price
NOI is net open interest i designates commercial
or non-commercial)
(1)
(2)
16
Grange causality test results Crude oil The
change in non-commercial net OI is Granger caused
by the change in commercial net OI, but it is not
Granger caused by the change in price. The
change in commercial net OI is caused by the
change in price, but not by the change in
non-commercial net OI. The change in crude oil
futures settlement price is not Granger caused by
changes in either commercial or non-commercial
net OI. Natural gas The change in non-commercial
net OI is Granger caused by the change in
commercial net OI, but it is not Granger caused
by the change in price. The change in commercial
net OI is Granger caused by the change in
non-commercial net OI (but only at the 7 level),
but not by the change in price. The change in
natural gas settlement price is not Granger
caused by changes in either commercial or
non-commercial net OI.
17
Conclusions

• No evidence of excessive trading
• No evidence of changes in net futures positions
  influencing futures price changes
• Some evidence that non-commercial trader activity
  is influenced by commercial trader activity, but
  not the reverse (but perhaps weakly for natural
  gas)

H.R. Stoll and R.E. Whaley (2009) Commodity
index investing and commodity futures prices,
http//papers.ssrn.com/sol3/papers.cfm?abstract_id
1478195 or http//openmarkets.cmegroup.com/wp-con
tent/uploads/2010/02/Stoll-Whaley-Report.pdf
18
THE ROLES OF HEDGERS AND SPECULATORS IN THE
NATURAL GAS AND CRUDE OIL MARKETS
Thank you! Questions and/or comments?
Prof. Ronald D. Ripple Curtin University