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Do Speculators Drive Crude Oil Futures Prices?

Abstract:
The coincident rise in crude oil prices and increased number of financial participants in the crude oil futures market from 2000-2008 has led to allegations that "speculators" drive crude oil prices. As crude oil futures peaked at $147/ bbl in July 2008, the role of speculators came under heated debate. In this paper, we employ unique data from the U.S. Commodity Futures Trading Commission (CFTC) to test the relation between crude oil prices and the trading positions of various types of traders in the crude oil futures market. We employ Granger Causality tests to analyze lead and lag relations between price and position data at daily and multiple day intervals. We find little evidence that hedge funds and other non-commercial (speculator) position changes Granger-cause price changes; the results instead suggest that price changes precede their position changes.

Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products, Energy Investment and Finance – Trading Strategies and Financial Instruments, Energy Modeling – Forecasting and Market Analysis,

Keywords: Crude Oil, Futures Markets, Speculators Granger Casualty, Hedge Funds, Commodity Index Traders

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No2-7

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Published in Volume 32, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.