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CFTC: Index Trader Activity on Nymex Fell as Oil Prices Rose

A report issued by the Commodity Futures Trading Commission's (CFTC) staff last Thursday showed that while crude oil futures prices rose on the New York Mercantile Exchange (Nymex) during the first half of the year, the level of activity by oil commodity index traders declined. The finding appears to refute the claim of Capitol Hill Democrats, who say that speculation by index traders drove crude oil prices up this year.

Moreover, "while there was an increase in the net notional value of commodity index business in crude oil futures, it appears to be due to an appreciation of the value of existing investments caused by the rise in crude oil prices and not the result of more money flowing into commodity index trading," the agency report said.

That said, the study could not identify the level of speculation associated with futures markets on the whole due to trader classification issues. In looking at the crude, wheat, corn and cotton futures markets, the report found, "This preliminary survey is not able to accurately answer and quantify the amount of speculative trading occurring in the futures markets."

CFTC staff noted that current data received by the commission is classified by trading entity as commercial versus noncommercial, as opposed to trading activity and speculation versus hedging.

"These trade classifications have grown less precise over time, as both groups may be engaging in hedging and speculative activity," the report stated. "Importantly, as a result of this survey, the commission recommends improvements to the clarification process and reporting requirements for large traders that will help the agency better quantify the nature and accuracy of trading activity being conducted on exchanges."

The survey's results are based on responses to a special call by the CFTC in June to futures traders, including swap dealers engaged in commodity index business, other large swap deals and commodity index funds.

It found that the net notional amount of commodity index investment related to Nymex crude oil rose from $39 billion to $51 billion between Dec. 31, 2007 and June 30 of this year. "This rise in notional value appears to have resulted from the increase in the price of oil, which rose from approximately $96/bbl to $140/bbl -- an increase of 46%," rather than from an infusion of more money by commodity index traders, according to the CFTC.

For the West Texas Intermediate (WTI) crude oil contract traded on Nymex as of June 30, the CFTC's special call covered 90% or more of the actual total long and total short futures and options positions held by all of the swap dealers and represented all of the index trading done through swap dealers, the CFTC staff report said.

While oil prices rose between December and June, the activity of commodity index traders during that period reflected a net decline of swap contracts as measured in standardized futures equivalents, it noted. The aggregate long positions of commodity index participants in Nymex crude oil declined by approximately 45,000 contracts (or 11%) during the six-month period -- from approximately 408,000 contracts on Dec. 31, 2007 to about 363,000 contracts on June 30.

As a result of staff findings, the CFTC said it believes that "certain constructive steps can and should be taken," and has approved the following recommendations:

"I welcome this new CFTC report and the recommendations for agency action with their current program authority. CFTC is rightly taking action with oversight of these markets. Yet the CFTC can and should go further," Senate Agriculture Chairman Tom Harkin (D-IA) said. "This CFTC report does not quantify the amount of speculative trading occurring in the futures markets. We cannot wait for the definitive answer to this critical issues. It is time to pass legislation to require [the] CFTC to impose appropriate position limits on exchange-traded energy futures contracts and to authorize limits on over-the-counter transactions."

The CFTC findings are at odds with those of a recent report that attributed the run-up in crude oil prices to speculation. During the first half of the year institutional investors poured more than $60 billion into the major commodity indexes, resulting in the purchase of approximately 187 million bbl of WTI crude oil futures that sent prices $33/bbl higher, said the report by Michael W. Masters, a hedge fund manager, and Adam K. White, director of research for White Knight Research and Trading. The report was backed by Democrats, including Sens. Byron Dorgan of North Dakota and Maria Cantwell of of Washington, and Rep. Bart Stupak of Michigan.

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