By LIAM DENNING
Like comedy, correlation analysis rests on timing.
In its latest monthly report, the Organization of the Petroleum Exporting Countries put a chart front and center showing the price of oil tracking closely the level of open interest in Nymex oil contracts. The message was that speculators are driving oil prices higher.
The timing is interesting in several respects. The Commodity Futures Trading Commission wants to limit the size of positions taken by speculators in the oil futures market. The deadline for public comment on the draft regulations passed Monday.
Position limits are aimed at curbing speculative excesses, which some blame for the spike in oil prices in 2008 and the 65% increase in prices over the past 12 months. A particular target is the passive investors putting money into buy-and-hold oil futures funds.
These funds do create demand for futures. But the effect on oil spot prices is more subtle. Passive investors raise the price of futures relative to the spot price of oil. That’s a big reason why the oil futures curve has sloped upward for most of the past five years, corresponding with when investment in commodity funds really took off.
As energy economist Phil Verleger observes, that premium for oil delivered further out in the future can create an incentive for sellers of futures to buy physical oil, store it and sell it forward. The result is bigger inventories of oil, acting as a buffer against shortages arising from unexpected swings in oil supply or demand. Mr Verleger points to this winter’s cold snap, which should have caused heating-oil prices to spike but did not due to the security provided by high inventories.
It’s worth remembering that after oil prices crashed in 1998, OPEC specifically targeted cutting global oil inventories to raise prices. As the past decade has demonstrated, it certainly helped in that regard.
This is why OPEC would love to see passive money forced out of the futures market. This would reduce the premium to spot prices and, hence, the incentive to store oil. Initially, the unwinding of these trades might cause oil prices to drop significantly as barrels flooded onto the market. Longer term, however, lower inventories would hand market power back to those producers controlling the world’s swing spare production capacity: Step forward OPEC.
In another interesting twist of timing, OPEC’s chart only begins in September 2009. As Deutsche Bank points out, extending the analysis back just to early 2008 would show a period during which net long positions on Nymex were falling yet crude was racing toward its all-time peak. It puts correlation between changes in net positions on Nymex and oil price moves at 17%—positive but hardly in lock step.
Even if OPEC’s timing is off, the sight of a cartel bemoaning market distortions really should raise a smile.