Who Is in the Futures Markets and How It Has Changed

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  • Topic: Futures contract, Commodity Futures Trading Commission, Futures exchange
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  • Published : February 25, 2013
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Who is in the Futures Market and How Has It Changed?
Dec. 29

Who is in the Futures Market and How Has It Changed?

A summary report of a study by James A. Baker III Institute for Public Policy Rice University. Office of OPEC Governor For enquires kindly contact Sammy AL Mehaid Sammy.mehaid@aramco.com

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Who is in the Futures Market and How Has It Changed?
Dec. 29

Introduction:
Leading up to 2008, oil prices experienced a steady, upward trend. Then, in 2008 oil prices climbed to unprecedented highs of $147 per barrel in July, only to fall dramatically in a very short period of time to a low of $30 per barrel in December 2008. This relatively dramatic movement in oil price has caused everyone from U.S. congressmen to ministers from the Organization of OPEC to call into question the role of speculative traders in oil futures market. As such the commodity futures trading commission (CFTC), the main regulator of U.S. oil futures markets, recently announced that a new review of the role of speculators in oil futures markets trading would be forthcoming. The Obama administration has already indicated that it will pursue greater regulation of market and is negotiating with the United Kingdom about possible coordination. The brief paper investigates and addresses the core question of whether speculative trading in oil has increased and whether the link between dollar and oil-related financial contracts has strengthened in the last several years. Finally, the paper discuses the interaction between these observed market trend regarding policies to use strategic government-held oil stocks.

I.

Crude oil Price: the paper discuss that it has been postulated that oil linked index funds became an asset class for investors wanting to escape the falling dollar and weakening stock market, adding to the speculative fervor in oil and causing even more damage to the U.S. economy. In 2008, U.S. oil imports totaled $331 billion. This represents an increase of 300 percent from 2002. Moreover, the U.S. oil import bill accounted for as much as 47 percent of the overall U.S. trade deficit in 2008, compared to only 19 percent in 2002. This rising financial burden contributed to the ongoing challenges for the U.S. economy from 2008 through 2009, and put pressure on the U.S. dollar. In the review of the data by the CFTC they find that non-commercials (traders) players now constitute about 50 percent of those holding outstanding positions in the U.S. oil futures market, compared to an average of about 20 percent prior to 2002, at the same time, it was seen as the principal factor behind the increase in open interest and it is also highly correlated with the run up in oil prices. The paper also highlights that there was a substantial change following the passage of the Commodity Future Modernization Act in December 2000. The paper also finds the correlation between movements in oil prices and the value of the dollar against the trade-weighted index of the currencies of foreign countries has increased to 0.82(a significant measure) for the period between 2001 and the present day, compared to a previously insignificant correlation of only 0.08 between 1986 and 2000. Recent shifts in the composition of oil market participants and dollar-oil correlations also correspond to changes in the

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Who is in the Futures Market and How Has It Changed?
Dec. 29

manner of regulation of commodity markets such as those implemented with the CFMA where the new regulations made it easier for financial players to obviate speculative limits and made it more difficult for the CFTC to regulate oil futures markets, moreover, changes at London’s Inter Continental Exchange (ICE) regarding U.S. delivery-based contracts also created problems with monitoring and limiting speculative activity since these contracts were outside the jurisdiction of the CFTC.

II. Oil futures markets: Who Trades and Why?
A wide array of financial tools was employed to...
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