July 2008

Thi s rep o r t i s in the publi c dom ain. Au th o ri z a ti on to re pr oduce i t in wh ole or in

p a r t is g r an ted.

While pe rmi s si on t o rep rin t thi s pu blic a ti on i s no t nece s s a ry, the ci t a ti on should

be: In te ra gen cy T a s k F o rce on C omm odi ty Ma r ke t s, Inte rim Rep o r t on Crude Oil,

W a shin g t on D.C.

All ph o t o g r aph s in thi s d ocumen t a re pr op rie t a ry and pri o r permi s si on f r om the

ph o t o g r apher is re q ui red fo r any use o r rep r oduc ti on o f the ph o t o g r aph s.
TABLE OF CONTENTS 

LIST OF FIGURES.......................................................................................................................................................................... II

INTRODUCTION...........................................................................................................................................................................1

EXECUTIVE SUMMARY ................................................................................................................................................................3

FUNDAMENTALS OF CRUDE OIL............................................................................. 7

BACKGROUND ............................................................................................................................................................................7

DEMAND.....................................................................................................................................................................................7

Global Economic Activity...............................................................................................................................................7

Increasing Consumption................................................................................................................................................8

Price Controls and Subsidies.........................................................................................................................................9

SUPPLY...................................................................................................................................................................................... 10

Stagnant Production .................................................................................................................................................... 10

Concentrated Spare Capacity .................................................................................................................................... 11

Low Inventories ............................................................................................................................................................. 12

Geopolitical Uncertainty.............................................................................................................................................. 13

PRICE-INELASTIC SUPPLY AND DEMAND ................................................................................................................................ 14

MACROECONOMIC VARIABLES............................................................................................................................................... 14

Exchange Rates.............................................................................................................................................................. 14

Interest Rates................................................................................................................................................................... 15

COMMODITY FUTURES MARKETS .......................................................................... 17

THE ROLE OF COMMODITY FUTURES MARKETS .................................................................................................................... 17

Futures Contract Design, Risk Management, and Price Discovery................................................................. 17

Hedging and Speculation........................................................................................................................................... 17

Publicly Available Information about U.S. Futures Markets.............................................................................. 19

ANALYSIS OF CRUDE OIL FUTURES MARKETS ........................................................................................................................ 20

Broad Trends in the Participant Structure of Crude Oil Futures Markets..................................................... 20

Detailed Structure of Crude Oil Futures Markets................................................................................................. 21

Term Structure of Futures Prices............................................................................................................................... 23

Speculators and Market Prices: Assessing Contemporaneous Relations..................................................... 25

Speculators and Market Prices: Assessing Dynamic Relations........................................................................ 27

CONCLUDING REMARKS ........................................................................................ 31

APPENDIX .............................................................................................................. 33

GRANGER CAUSALITY TESTS ................................................................................................................................................... 33

GLOSSARY OF FUTURES MARKETS TERMS ............................................................ 35

i
List of Figures 

Figure 1 World GDP and Oil Production............................................................................................................................7

Figure 2 Oil Intensity.................................................................................................................................................................8

Figure 3 Annual Growth in World Oil Consumption .....................................................................................................9

Figure 4 Oil Consumption Growth by Country from 2003 to 2008 ..........................................................................9

Figure 5 Non-OPEC Supply Growth..................................................................................................................................10

Figure 6 Increasing Reliance on OPEC Production ......................................................................................................11

Figure 7 Lower Surplus World Oil Production Capacity .............................................................................................12

Figure 8 OECD Commercial Stocks ...................................................................................................................................13

Figure 9 Oil Prices and Exchange Rates...........................................................................................................................15

Figure 10 WTI Average Open Interest by Non-Commerical Participants, 2003-2008.......................................21

Figure 11 WTI Average Open Interest by Commercial Participants, 2003-2008.................................................22

Figure 12 WTI Net Positions of Commercial Participants, January 2003 to June 2008 ....................................23

Figure 13 Term Structure of Crude Oil Prices.................................................................................................................24

Figure 14 Private Crude Oil and Petroleum Product Inventories.............................................................................25

Figure 15 Correlations between Changes in Prices and Changes in Net Positions...........................................26

Figure 16 Granger Causality Tests relating Daily Position Changes to Price Changes in the

NYMEX WTI Crude Oil Futures Contract from January 2000 to June 2008...............................................28

ii
ITF Interim Report on Crude Oil

Introduction 

The prices of crude oil and other commodities have become a key concern of consumers, businesses, and 

policymakers in the United States and abroad. In light of the challenges posed by high commodity prices, 

several Federal agencies are engaged in the analysis of developments in commodity markets. In an effort

to develop, consolidate, and disseminate this knowledge, the Commodity Futures Trading Commission 

(CFTC or Commission) invited staff from several Federal agencies to participate in an Interagency Task

Force on Commodity Markets (Task Force or ITF). The other Task Force participants include staff from

the Departments of Agriculture, Energy, and the Treasury, the Board of Governors of the Federal Reserve 

System, the Federal Trade Commission, and the Securities & Exchange Commission.1 Each of these 

agencies brings unique experience and expertise to bear on the analysis of commodity markets.

The Task Force is chaired by CFTC staff, which has responsibility for overseeing the U.S. commodity

futures and commodity options markets. The Task Force is examining conditions in the commodity

markets and will report further on its work later this year. Given the intense interest generated by the 

recent surge in crude oil prices, the Task Force is issuing an interim staff report limited to the crude oil 

market. This staff report is preliminary in nature, and the Task Force will continue to study the crude oil 

market as part of its longer-term activities. 

We hereby submit the Interagency Task Force’s Interim Report on Crude Oil.

 

1 Although the staff from these agencies participated in the Task Force, agency principals, Commissions, 

and Commissioners did not specifically authorize or vote to approve the findings of this interim report. 

Introduction 1

ITF Interim Report on Crude Oil

Executive Summary 

In June 2008, the Commodity Futures Trading Commission (CFTC or Commission) formed an 

Interagency Task Force on Commodity Markets (Task Force or ITF). The Task Force draws on a broad

range of government expertise on the fundamental factors and market forces affecting commodity

markets. In light of the recent increases in energy prices and the resulting concerns of the public and 

policymakers, the Task Force has prepared this interim report on crude oil, which offers a preliminary 

assessment of fundamental and market factors affecting the crude oil market between January 2003 and

June 2008. 

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between 

January 2003 and June 2008 are largely due to fundamental supply and demand factors. During this 

same period, activity on the crude oil futures market – as measured by the number of contracts

outstanding, trading activity, and the number of traders – has increased significantly. While these

increases broadly coincided with the run-up in crude oil prices, the Task Force’s preliminary analysis to

date does not support the proposition that speculative activity has systematically driven changes in oil 

prices. 

The world economy has expanded at its fastest pace in decades, and that strong growth has translated into

substantial increases in the demand for oil, particularly from emerging market countries. On the supply

side, the production of oil has responded sluggishly, compounded by production shortfalls associated with

geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on substitutes for oil in

the short term, very large price increases have occurred as the market balances supply and demand. 

If a group of market participants has systematically driven prices, detailed daily position data should show 

that that group’s position changes preceded price changes. The Task Force’s preliminary analysis, based

on the evidence available to date, suggests that changes in futures market participation by speculators

have not systematically preceded price changes. On the contrary, most speculative traders typically alter

their positions following price changes, suggesting that they are responding to new information – just as 

one would expect in an efficiently operating market.

The Task Force will continue to develop its analysis of crude oil and expand its work to cover other 

commodities in the coming months. New data from the CFTC’s Special Calls on the activities of

commodity swap dealers and commodity index traders is expected to become available for review during

this time. In addition, an examination of prices in other commodities is expected to further enhance 

understanding of commodity markets. 

Fundamentals and Crude Oil Prices 

On the demand side, world economic activity has expanded at close to 5 percent per year since 2004,

marking the strongest performance in two decades. Between 2004 and 2007, global oil consumption

grew by 3.9 percent, driven largely by rising demand in emerging markets that are both growing rapidly 

and shifting toward oil-intensive activities. Also, some of the fastest growing nations also rely on price

subsidies that hold down the prices of oil and refined products such as gasoline, which further boosts oil 

consumption. 

While global demand has proven strong, oil production growth has not kept pace. In the past three years,

non-Organization of Petroleum Exporting Countries (OPEC) production growth has slowed to levels well 

Executive Summary 3
ITF Interim Report on Crude Oil

below historical averages, and world surplus capacity has fallen below historical norms. Preliminary 

inventory data also shows that Organisation for Economic Co-operation and Development (OECD) stocks 

have fallen below 1996-2002 levels. Moreover, supply disruptions have adversely affected both world oil

production and exports. 

The imbalance between scarce supply and growing demand, and expectations that this imbalance will

persist in the future, have led to upward pressure on oil prices and greater market reactions to any actual

or perceived disruptions in available supply. Under such tight market conditions, it is often the case that

only large price increases can re-establish equilibrium between supply and demand. Consequently, large

or rapid movements in oil prices are not inconsistent with the fundamentals of supply and demand; such

price movements, by themselves, do not indicate that prices have become divorced from fundamentals.

Further, if speculative positions, rather than fundamentals, were pushing prices upward, then inventories

would be expected to rise. To date, there is no evidence of such an accumulation; in fact, known inventory

levels actually have declined. 

Analysis of Crude Oil Futures Markets 

Activity in crude oil futures and options contracts has been increasing since 2004. During that period, the 

number of contracts outstanding (known as “open interest”) has more than tripled, and the number of 

traders has almost doubled. The fastest growth in open interest has been recorded among noncommercial traders – often called “speculators” – holding spread positions combining long positions in 

one month with short positions in another month. Thus, while the long positions of non-commercial

traders have increased, the short positions of non-commercial traders also have increased. Additionally,

although the net long positions of non-commercial traders have increased somewhat since 2004 – which 

some market observers have hypothesized has pushed prices up – the proportion of those positions has

been relatively constant as a share of open interest over the last few years, undercutting that hypothesis. 

Much of the attention related to participants in futures markets has focused on the role of commodity 

index investment funds and the commodity swap dealers that often act as their intermediaries. During

the period studied, January 2003 through June 2008, pension funds and other investors have 

increasingly used index funds as vehicles to participate in commodity markets. Some observers have

suggested that this rapid inflow of investments through index funds has been a cause of oil price

increases. The CFTC has issued Special Calls for data about this activity, but only partial responses have 

been received as of the date of publication of this interim report. An analysis of the data from these 

Special Calls will be made available in September. 

The data currently at hand – which incorporates non-public surveillance information – includes positions

held by commodity swap dealers. Commodity swap dealers offer institutional investors contracts whose 

returns are linked to a variety of commodity indices. Broadly speaking, after netting their index fund

clients’ positions against the positions of their other clients, these dealers use futures contracts to hedge

the risk remaining from this business. Thus, the activity of commodity index participants should become

evident in the position changes of commodity swap dealers. 

Non-public CFTC trading data shows that commodity swap dealers have held roughly balanced long and 

short positions in the crude oil market over the last year and actually held a net short position over the 

first five months of 2008 – that is, swap dealers’ futures positions would have benefited more from price

decreases than from price increases like the ones experienced in the last few months. Moreover, any 

Executive Summary 4
ITF Interim Report on Crude Oil

upward price pressure exerted by the long positions of swap dealers’ commodity index clients has largely

been offset by the short positions of the dealers’ other clients. 

The Task Force’s preliminary analysis also suggests that changes in the positions of swap dealers and noncommercial traders most often followed price changes. This result does not support the hypothesis that

the activity of these groups is driving prices higher. The Task Force has found that the activity of market

participants often described as “speculators” has not resulted in systematic changes in price over the last

five and a half years. On the contrary, most speculative traders typically alter their positions following

price changes, suggesting that they are responding to new information – just as one would expect in an

efficiently operating market. In particular, the positions of hedge funds appear to have moved inversely 

with the preceding price changes, suggesting instead that their positions might have provided a buffer

against volatility-inducing shocks. 

The Task Force will continue working on the analysis of commodity markets and issue further findings 

later this year.2

 

2 Matters of illegal manipulation of commodity prices are outside the scope of this interim report. 

Executive Summary 5

ITF Interim Report on Crude Oil

Fundamentals of Crude Oil 

Background 

Recent crude oil price increases are an extension of oil market developments originating in the 1990s. At

that time, relatively high inventories and ample surplus production capacity served to limit oil price 

fluctuations. When spot market prices moved up or down, futures contracts requiring delivery in distant 

months generally traded close to $20 per barrel, consistent with a market expectation that producers

would ensure that spot prices would eventually return to that level. However, as leading OPEC members

shifted toward a tight inventory policy and global oil demand recovered from the slowing effect of Asia’s 

financial crisis, the global market balance tightened and inventories declined sharply at the beginning of

the present decade. Oil prices rose to $30 per barrel in what might be seen as the first leg of the upward

trend. By 2003, inventories were drawn down sufficiently such that subsequent increases in global

demand stretched oil production to levels near capacity. The large, unexpected jump in world oil

consumption growth in 2004, fostered by strong growth in economic activity in Asia, reduced excess

production capacity significantly. Now, in mid-2008, despite high prices, world oil consumption growth 

remains strong, overall non-OPEC production growth continues to slow, and OPEC oil production has not 

grown sufficiently to fill the gap. In addition, geopolitical risks create considerable uncertainty about 

future supplies. 

Demand 

Global Economic Activity 

The key driver of oil demand has been robust global economic growth, particularly in emerging market 

economies. As shown in Figure 1, world gross domestic product (GDP) growth (with countries weighted

by oil consumption shares) has averaged close to 5 percent per year since 2004, marking the strongest

performance in two decades. 

Figure 1 World GDP and Oil Production 

Fundamentals of Crude Oil 7
ITF Interim Report on Crude Oil

In addition to the pace of world economic activity, oil demand has been further supported by the

composition of growth across countries. As shown in Figure 2, China, India, and the Middle East use

substantially more oil to produce a dollar’s worth of real output than the United States. These economies

are among the fastest growing in the world; together they have accounted for nearly two-thirds of the rise

in world oil consumption since 2004. Moreover, these economies still consume relatively little oil on a 

per capita basis. Over the longer term, as these economies continue to develop and incomes rise, per

capita energy use is likely to increase further. 

Figure 2 Oil Intensity

Increasing Consumption

The rise in global economic activity has been accompanied by corresponding growth in world oil

consumption. Since 2003, world oil consumption growth has averaged 1.8 percent per year, representing

an estimated 1 million barrels per day in 2008. Non-member countries of the OECD, especially China,

India, and the Middle East, represent the largest part of this growth. (Figures 3 and 4) Despite higher

prices, growth in world oil consumption remains strong.

Fundamentals of Crude Oil 8
ITF Interim Report on Crude Oil

Figure 3 Annual Growth in World Oil Consumption

Figure 4 Oil Consumption Growth by Country from 2003 to 2008

Price Controls and Subsidies 

Many emerging market and developing economies use subsidies and other administrative measures to

control domestic fuel prices. These administered prices are generally set below global market prices and,

therefore, artificially boost the demand for oil. Indeed, essentially all of the increase in global oil 

consumption this year is expected to be in countries where fuel prices are subsidized and demand is not

Fundamentals of Crude Oil 9
ITF Interim Report on Crude Oil

fully responsive to price signals. Price controls and subsidies interfere with the economic link between

market prices and consumption.

Supply

Stagnant Production 

While global demand has remained strong, overall non-OPEC production growth has slowed. In the past

three years, non-OPEC production growth has been well below rates seen earlier this decade. World oil 

consumption growth has simply outpaced non-OPEC production growth every year since 2003. This 

imbalance increases reliance upon OPEC production and/or inventories to fill the gap. However, since

2003, OPEC oil production has grown by only 2.4 million barrels per day while the “call on OPEC” 

(defined as the difference between world consumption and non-OPEC production) increased by 4.4 

million barrels per day. As a result, the world oil market balance has tightened significantly. (Figures 5

and 6) 

Figure 5 Non-OPEC Supply Growth

Fundamentals of Crude Oil 10
ITF Interim Report on Crude Oil

Figure 6 Increasing Reliance on OPEC Production

Concentrated Spare Capacity 

World surplus production capacity remains low (the estimated 1.35 million barrels per day in June 2008

is equivalent to less than 2 percent of consumption, an amount well below the 1996-2003 annual average

of 3.9 million barrels per day). This puts upward pressure on prices and leaves world oil markets 

vulnerable to supply disruptions. (Figure 7) In addition, this surplus capacity is highly concentrated in a

few countries, with Saudi Arabia holding almost all of this capacity. Without significant surplus capacity,

market participants can no longer rely on increased production from key members of OPEC to offset

supply disruptions and restore balance without the need for significant price changes (as was the case in 

the 1990s). The combination of these factors means that prices react strongly to actual or perceived

supply disruptions.

Fundamentals of Crude Oil 11
ITF Interim Report on Crude Oil

Figure 7 Lower Surplus World Oil Production Capacity

Low Inventories 

OECD stocks were at record lows in 2003, following a major strike by oil workers in Venezuela. (Figure 8) 

Preliminary OECD inventory data for the first part of 2008 shows that OECD stocks have again fallen

below levels seen in 1996-2002. Because oil use has been growing over time, inventories are even tighter

when considered on a “days of supply” basis (defined as dividing inventories by the level of consumption).

In addition, U.S. inventories for crude oil and key petroleum products are relatively low. After remaining

relatively high for much of 2006 and the first half of 2007, U.S. crude oil inventories have fallen toward

the bottom end of the average range. Crude oil and petroleum product stocks in other OECD regions

exhibit the same declining trend.

Fundamentals of Crude Oil 12
ITF Interim Report on Crude Oil

Figure 8 OECD Commercial Stocks

Geopolitical Uncertainty 

There is currently a high degree of uncertainty in world oil markets due to fears about the adequacy of oil 

supplies in the future. Current world oil supplies are highly concentrated, and much of those supplies are 

held by nations that limit access to private investment, thereby preventing full development of production

through enhanced expertise and technology. In 2007, the top 10 oil producers represented about half of

total world production. In addition, geopolitical risk surrounds many of these top producers, either

because of current supply disruptions (Iraq, Nigeria) or the perceived threat of a disruption (Iran,

Venezuela). Finally, as noted previously, there is little surplus production capacity available to offset any

disruption.

Supply disruptions are a frequent occurrence in the oil industry. During the past 24 months, there have 

been almost two dozen supply disruptions, lasting from a few days to many weeks, which affected world

oil production and exports. These disruptions were caused by power failures, worker strikes, pipeline 

leaks and explosions, cyclones and hurricanes, saboteurs, and civil wars. More than half of these

disruptions resulted in oil production outages exceeding 100,000 barrels per day. The most significant of 

these to oil markets resulted from the ongoing strife in Iraq and Nigeria. These disruptions have varied in 

size over time, with Iraq losing more than 500,000 barrels per day of exports in March 2008 and Nigeria 

reaching more than 1.4 million barrels per day of shut-in production at one point in April 2008. 

Actual supply disruptions directly affect world oil markets due to a loss of physical barrels available to the

market. Concern over the impact of potential supply disruptions is reinforced by the limited amount of 

spare production capacity available. As long as potential disruptions, either realized (as in Iraq and

Fundamentals of Crude Oil 13
ITF Interim Report on Crude Oil

Nigeria) or perceived (as in concerns about the potential loss of supply from Iran), exceed the amount of

additional production capacity that can be brought online quickly, geopolitical concerns will weigh heavily 

on oil markets. 

Price-Inelastic Supply and Demand 

The current short-run demand for oil is relatively price inelastic, meaning the quantity demanded does

not change much relative to price changes (it takes a very large price increase to reduce the quantity

demanded significantly). In the short run, the supply of oil is inelastic as well: the quantity supplied is not 

responsive to changes in market price, due to low spare capacity, the inability to bring new supplies online 

quickly, and relatively low inventories to draw down. If both supply and demand are not very responsive 

to prices, it takes large price increases to return markets to equilibrium if they get out of balance 

temporarily. 

As noted previously, world oil production has remained relatively flat in recent years as global economic

growth has kept demand strong. Consequently, oil prices have risen to keep world oil consumption in line

with production (the two must be equal aside from changes in inventories). As oil demand is very 

insensitive to moves in oil prices in the near term, the rise in oil prices has been disproportionately large 

in order to offset the robust, income-driven rise in demand. 

An implication of these structural features of the oil market is that large and rapid movements in oil prices 

are not, by themselves, evidence that prices are behaving in a manner that is inconsistent with the 

fundamentals of demand and supply. Indeed, in such tight market conditions, relatively small changes in

demand and supply should be expected to lead to large price swings. That said, there is a certain degree of

uncertainty regarding the true state of market fundamentals at any point in time.

Macroeconomic Variables 

Exchange Rates 

The relationship between exchange rates and oil prices is complex, and the causality can run both from 

exchange rates to oil prices and from oil prices to exchange rates. Typically, a depreciation of the dollar

would be expected to lead to a rise in the dollar price of oil. As oil is priced in dollars, a lower exchange

value of the dollar reduces the foreign-currency price and thus boosts demand. To clear the market, the 

dollar price of oil must then rise, assuming (reasonably) that supply is not perfectly elastic. 

Empirical studies do not reveal a clear, precisely estimated relationship between oil prices and the

exchange value of the dollar. The available evidence suggests that oil prices respond approximately 

proportionately to changes in the dollar when all other economic factors are held constant. In other 

words, a 10 percent depreciation of the nominal, trade-weighted, multilateral exchange value of the dollar

is associated with a 10 percent rise in the dollar price of oil when other factors are held constant. That 

finding suggests that the depreciation of the dollar since 2002 has contributed to the rise of the dollar

price of oil, but can explain only a portion of the overall run-up. This point is also evident in Figure 9, 

which graphs the spot price of West Texas Intermediate crude oil in several currencies. Clearly, oil prices 

have risen sharply regardless of the currency of denomination. Moreover, from mid-March through June 

2008, the dollar was stable, whereas oil prices increased appreciably. 

Fundamentals of Crude Oil 14
ITF Interim Report on Crude Oil

Figure 9 Oil Prices and Exchange Rates

An additional linkage between exchange rates and oil prices may arise through the production decisions of 

key oil exporters. Oil exporters suffer a decline in the purchasing power of their revenues when the dollar

depreciates. To defend their international purchasing power, these producers could, in principle, seek an

offsetting increase in the dollar price of oil by curtailing supply. 

Shocks specific to the oil market can also feed back into exchange rates. As the United States is both a

major producer and consumer of oil, increases in oil prices tend to lead to depreciations against the

currencies of major oil exporters and appreciations against the currencies of major oil importers. 

Empirically, these bilateral exchange rate movements often tend to cancel out, resulting in little net

change in the multilateral value of the dollar. During the past few years, however, the nominal value of

U.S. oil imports has soared, resulting in a significantly wider trade deficit than would have otherwise

occurred. This widening may have exacerbated concerns about the sustainability of the current account

deficit, thereby putting downward pressure on the dollar.

Interest Rates 

The relation between interest rates and oil prices can vary, as it depends on the interactions of many

economic variables. A decline in interest rates by itself might be expected to raise oil prices to some

extent, suggesting a negative correlation between these two variables. But if the decline in interest rates is 

in reaction to a downturn in economic activity, oil prices may very well fall in response to that weaker

demand, resulting in a positive correlation.

One mechanism by which declines in interest rates could push up oil prices is through a reduction in the

costs associated with storing oil and other commodities. An implication of this hypothesis is that

inventories of oil should tend to rise when interest rates decline. Such increases, however, are not evident

in the available data. 

Fundamentals of Crude Oil 15
ITF Interim Report on Crude Oil

Another channel through which lower U.S. interest rates could drive up oil prices is by leading to

excessively expansionary policies and faster increases in oil demand in countries that peg their currencies

to or manage their currencies against the dollar. In the current setting, the stance of monetary policy in

the United States, which has come in response to concerns about the domestic economic outlook, may not 

be appropriate for many fast-growing, commodity-intensive economies. In practice, however, much

uncertainty surrounds the extent to which foreign central banks have matched U.S. monetary policy

moves, the effect of this on foreign economic growth, and its ultimate influence on commodity prices. 

Fundamentals of Crude Oil 16
ITF Interim Report on Crude Oil

Commodity Futures Markets 17

Commodity Futures Markets 

The Role of Commodity Futures Markets 

Futures Contract Design, Risk Management, and Price Discovery3

A futures contract is an agreement between two parties to buy and sell a given amount of a commodity at 

an agreed upon date in the future, at an agreed upon price and at a given location. For example, the New 

York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) December 2008 oil contract is an 

agreement to deliver 1000 barrels (42 thousand gallons) of oil at Cushing, Oklahoma during December 

2008. The buyer (or long trader) and the seller (or short trader) agree to a price when they enter into the 

contract. Unless offset, these contracts require their counterparties to deliver or to take physical delivery 

of a commodity.4 A party whose contract remains open at its expiration date is obligated to make or take 

delivery as promised. 

Futures contracts are instruments primarily designed to manage risk - they are identical in all aspects 

except for the contracted price; they are generally traded on exchanges; cleared through designated 

clearinghouses; and often may be settled in cash rather than requiring physical delivery. Due to their 

standardization, crude oil futures contracts are not generally suited to allocate the physical commodity. 

For example, to serve a mainly allocative role, crude oil futures contracts would need to offer multiple 

locations for physical delivery. In fact, between 2003 and May 2008, only about 2 percent of oil futures 

contracts resulted in physical delivery. 

Because futures contracts are standardized in all respects other than price, futures markets are ideal for 

aggregating a multiplicity of opinions about the expected price of a commodity at different points in time. 

It is often easier for a common view on an expected price to emerge at a futures exchange than among 

dispersed producers and consumers of a physical (cash) commodity. For that reason, futures markets are 

an important source of price information - prices are often said to be “discovered” in futures markets and 

then communicated to participants in certain cash markets. 

The price discovery function of futures markets is extremely valuable in terms of planning business 

activities and for allocating commodity price risk. The availability of publicly-observed futures prices for 

several years into the future makes it possible to recognize, plan, and finance needed adjustments in 

supply and demand early on. This, in turn, may help reduce price volatility. For example, price volatility 

is generally higher in markets without a successful futures contract, such as those for fertilizers, coal, tea, 

and onions. For example, while onion futures contracts are explicitly banned by law, it has been reported 

that cash prices for onions rose 400 percent between October 2006 and April 2007, fell 96 percent by 

March 2008, and then rebounded 300 percent by April 2008. 

Hedging and Speculation 

The distinction between hedging and speculation in futures markets is less clear than it may appear. 

Traditionally, those with a commercial interest in or an exposure to a physical commodity have been 

called hedgers, while those without such an exposure have been called speculators. In practice, however, 

 

3 Glossary of Futures Markets Terms is provided at the end of this report. 

4 Not all futures contracts require physical delivery. 
ITF Interim Report on Crude Oil

Commodity Futures Markets 18

hedgers may be “taking a view” on the price of a commodity, and even those who are not participating in 

the futures market despite having an exposure to the commodity could be considered speculators. 

Traditional speculators enter into futures contracts with the intention of reversing their positions before 

they would be required to deliver (short positions) or to accept physical delivery (long positions) of a 

commodity. As such, speculators serve important market functions – immediacy of execution, liquidity, 

and information aggregation. 

Traditional speculators could further be differentiated depending on the time horizons during which they 

operate. Speculators known as scalpers or market makers operate at the shortest time horizon – 

sometimes trading within seconds. These traders typically do not trade with a view as to where prices are 

going. Instead, they provide immediacy of execution to others wishing to trade. That is, they “make 

markets” by standing ready to buy or sell at a moment’s notice. These market makers will usually offset 

their positions soon after entering into them. The goal of a market maker is to buy contracts at slightly 

lower prices than the current market price and sell them at slightly higher prices, perhaps at only a 

fraction of a cent profit on each contract. By trading hundreds or even thousands of contacts a day, skilled 

market makers can earn a profit. Absent a market maker, a market participant would have to wait until 

the arrival of another party with an opposite trading interest. 

Other types of speculators take longer term positions based on their view of where prices may be headed. 

These speculators may anticipate price trends lasting from minutes or hours to days, weeks or months 

and take positions accordingly. At the monthly horizon, these speculators often trade in the futures 

markets with spread positions—taking long positions in one month while taking short positions in 

another. Through their efforts to gather information on underlying commodities, the activity of these 

traders serves to bring information to the markets and aid in price discovery. These speculators are also 

important to the market in that they often supply overall liquidity to hedgers in futures market. 

While hedgers are not generally associated with price discovery activities, these commercial interests 

often do play an important price discovery role. In essence, futures prices are a consensus of the opinions 

of those who enter the market. Moreover, the actions of those who choose not to enter the futures market 

are also quite important for price discovery. For example, a commercial trader holding physical 

inventory, but choosing not to hedge this inventory with a short position in the futures market, will 

withhold a downward pressure on the price. 

Futures markets are not the only way for traders to manage exposure to commodities. Crude oil options 

on futures can also be used to manage crude oil exposures. In fact, traders who combine options and 

futures positions can speculate on price ranges and volatility changes in addition to the direction of 

expected futures price changes. 

A robust over-the-counter (OTC) market exists to trade oil contracts as well. Activities that occur in the 

OTC market can affect U.S. futures markets as well. Intermediaries in the OTC market often use futures 

contracts to manage the price exposures inherent in their OTC activities, for instance. Commodity swap 

dealers, in particular, offer complex and tailored swap contracts to clients in the OTC markets. As 

intermediaries, these swap dealers can often offset the long positions of one client with the short positions 

of another client. Where mismatches exist, however, the swap dealer may be exposed to price risk as the 

counterparty to an unmatched trade. In these instances, swap dealers increasingly look to the futures 
ITF Interim Report on Crude Oil

Commodity Futures Markets 19

markets to manage this risk. Indeed, for this reason, the CFTC has long considered swap dealers as 

hedgers in the futures markets. 

Publicly Available Information about U.S. Futures Markets 

To provide the public with information on the activity of traders in the futures and options markets, the 

CFTC publishes a weekly Commitments of Traders (COT) report. The report is released every Friday at 

3:30 p.m. Eastern time and contains a summary of traders’ positions as of the close of business on the 

previous Tuesday for each market in which 20 or more traders hold positions equal to or above the large 

trader reporting levels established by the CFTC.5 

The summary of market activity contained in the weekly COT reports is available in a variety of formats—

i.e., long and short format, as well as in futures-only and futures-and-options-combined format—and are 

available on the CFTC’s website. Beginning in 2007, the CFTC also began publishing a supplemental 

report for selected agricultural markets showing all the information in the short format report plus the 

positions of traders classified as “index traders.” These supplemental reports have been produced 

specifically to shed light on index trader activity in the U.S. futures markets. The CFTC recognizes the 

value of increased transparency as financial entities increasingly participate in commodity markets.6

The information regarding the reportable positions of traders contained in the COT reports is drawn from 

the reports that the CFTC receives daily from clearing members, futures commission merchants, and 

foreign brokers. If, at the daily market close, a reporting firm has a trader with a position at or above the 

CFTC’s reporting level in any single futures month or option expiration, the firm reports that trader’s 

entire position in all futures and options expiration months in that commodity, regardless of size. The 

aggregate of all traders’ positions reported to the CFTC usually represents 70 to 90 percent of the total 

open interest in any given market. From time to time, the CFTC will raise or lower the reporting levels in 

specific markets to strike a balance between collecting sufficient information to oversee the markets and 

minimizing the reporting burden on the futures industry. During the past five years, the COT reports for 

crude oil capture well over 90 percent of total open interest. 

When an individual reportable trader is identified to the CFTC, the trader is classified either as 

“commercial” or “non-commercial.” All of a trader’s reported futures positions in a commodity are 

classified as commercial if the trader uses futures contracts in that particular commodity for hedging as 

defined in CFTC regulations. Generally, this definition reflects a matching of a futures position with a 

commercial market risk and does not consider the motivation for entering into a hedge. A trading entity 

generally gets classified as a “commercial” trader by filing a statement with the CFTC, on a standard 

reporting form, that it is commercially “...engaged in business activities hedged by the use of the futures 

or option markets.” To ensure that traders are classified with accuracy and consistency, CFTC staff may 

exercise judgment in re-classifying a trader if it has additional information about the trader’s use of the 

markets.7

 

5 Reporting levels can be found in CFTC regulations and can be accessed from the CFTC’s website, 

www.cftc.gov. 

6 For more information on the CFTC’s Supplemental report see, “Commodity Futures Trading 

Commission: Commission Actions in Response to the ‘Comprehensive Review of the Commitments of 

Traders Reporting Program’ (June 21, 2006),” available at the CFTC’s website, www.cftc.gov. 

7 The analysis in this report is based on data updated through July 18, 2008. 
ITF Interim Report on Crude Oil

Commodity Futures Markets 20

A trader may be classified as a commercial trader in some commodities and as a non-commercial trader in 

other commodities. A single trading entity cannot be classified as both a commercial and non-commercial 

trader in the same commodity. Nonetheless, a multi-functional organization that has more than one 

trading entity may have each trading entity classified separately in a commodity. For example, a financial 

organization trading financial futures may have a banking entity whose positions are classified as 

commercial and have a separate money-management entity whose position are classified as noncommercial. 

In classifying traders as commercial or non-commercial rather than hedgers and speculators, the CFTC 

recognizes that the ultimate motivations for trading futures by commercial and non-commercial traders 

cannot be observed. That is, while a commercial trader may be matching a futures position against a cash 

market price risk, it is not known whether such a trader is doing so on a routine basis in order to minimize 

ongoing price risks or doing so selectively based on specific market expectations. Thus, some of the 

trading information captured by the commercial trading category may reflect activity that could be 

characterized more as speculative rather than hedging. 

Analysis of Crude Oil Futures Markets8

Broad Trends in the Participant Structure of Crude Oil Futures Markets 

According to the publicly-available Commitments of Traders (COT) reports, activity in the West Texas 

Intermediate (WTI) light sweet crude oil contracts has grown markedly since 2000. In the last three and 

a half years alone, open interest across all available contract maturities (the number of contracts open at 

the end of each day) in WTI futures and futures-equivalent (or “adjusted”) option contracts traded on the 

New York Mercantile Exchange (NYMEX) has more than tripled from around 900,000 contracts in 

January 2004 to more than 2.9 million contracts in June 2008. During the same period, the number of 

large traders has also grown – almost doubling since January 2004, from approximately 220 to just under 

400 reporting traders. These figures speak to the competitiveness and depth of the crude oil futures 

markets in the U.S. 

The COT reports also present the breakdown of the overall open interest between commercial and noncommercial traders grouped into long, short, and spread positions. While all types of positions have 

grown during the last three and a half years, the COT data suggests that it is the spread positions of noncommercial traders that have had the fastest growth rate. While overall open interest has tripled since 

2004, non-commercial spread positions have increased six-fold. Notably, spread positions involve long 

positions in one month combined with short positions in another month so that spread traders are 

speculating on differences between futures prices in different months rather than the overall price level of 

crude oil. 

Since 2004, both the long and short positions of non-commercial traders have increased. Over that time 

period, the positions of non-commercial traders have been net long and have also increased; however, the 

proportion of those positions has been relatively constant as a share of open interest over the last few 

 

8 This section largely summarizes findings in an upcoming CFTC research paper analyzing changes in the 

level and composition of end-of-day open interest in the U.S. crude oil futures market. See Büyükşahin, 

Haigh, Harris, Overdahl and Robe: “Market Growth and Trader Participation in Futures Markets,” CFTC 

– Office of the Chief Economist Working Paper, forthcoming, August 2008. 
ITF Interim Report on Crude Oil

years, undercutting the hypothesis that an increase in the net long positions by non-commercial traders 

has pushed prices up recently. 

Detailed Structure of Crude Oil Futures Markets 

Whereas the publicly available data only identifies “commercial” and “non-commercial” categories of 

participants in the crude oil futures market, the COT report is built upon confidential CFTC data collected

for market surveillance purposes that allows for a more precise categorization. 

For both analytical and presentational purposes, this confidential data was aggregated into broad subcategories. Sub-categories for commercial participants include commercial producers, commercial 

manufacturers, commercial dealers, and swap dealers. Sub-categories for non-commercial participants 

include hedge funds and floor brokers and traders. These six commercial and non-commercial subcategories account for approximately 80 percent of open interest in the crude oil futures market. 

Figures 10 and 11 show that the increases in both commercial and non-commercial activity, as previously

summarized in publicly available COT data, are broad-based. Among the non-commercial participants, 

both hedge funds and floor brokers and traders exhibit robust growth in open interest. 

Figure 10 WTI Average Open Interest by Non-Commerical Participants, 2003-2008 

2003 2004 2005 2006 2007 2008

Floor Brokers & Traders

Hedge Funds

-

250,000

500,000

750,000

1,000,000

Source: Büyüksahin et al, CFTC, 2008

Source: Büyüksahin et al, CFTC, 2008 

Among commercial traders, much of the growth in open interest comes from greater activity by two 

categories – commodity swap dealers and commercial dealers. While commercial dealers utilize futures 

trading to manage price risk for the purchase and sale of physical commodities, commodity swap dealers

Commodity Futures Markets 21
ITF Interim Report on Crude Oil

use futures markets to manage price risk stemming from their OTC swap business (as discussed 

previously) and also to handle the majority of commodity index trades in the futures markets. To improve

market transparency, in June 2008, the CFTC issued a Special Call for, among other things, disaggregated

information concerning OTC swaps from swap dealers and commodity index traders. 

Figure 11 WTI Average Open Interest by Commercial Participants, 2003-2008 

2003 2004 2005 2006 2007 2008

Manufacturers

Producers

Commercial Dealers

Commodity Sw ap Dealers

-

250,000

500,000

750,000

1,000,000

Source: Büyüksahin et al, CFTC, 2008 Source: Büyüksahin et al, CFTC, 2008 

Commodity index funds have grown significantly during the past few years, bringing significant long

positions to commodity markets. In the futures markets, these funds have typically been long-only funds,

buying near-term futures contracts and rolling their positions into more distant months as the delivery 

month approaches. Commodity index funds are often utilized by pension funds and other large

institutions that seek commodity exposure to diversify existing portfolios of stocks and bonds and this

exposure is provided by swap dealers. Although commodity swap dealers’ gross positions have grown 

significantly, swap dealers' net positions decreased substantially between 2006 and June 2008. (Figure 

12) This suggests that flows from commodity index funds have been offset by other swap dealer activity

and thus have not necessarily contributed to the recent price increases in crude oil. 

Commodity Futures Markets 22
ITF Interim Report on Crude Oil

Figure 12 WTI Net Positions of Commercial Participants, January 2003 to June 2008 

2003

2004

2005

2006

2007

2008

Manufacturers

Producers

Commercial Dealers

Commodity Sw ap Dealers -10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Source: Büyüksahin et al, CFTC, 2008 Source: Büyüksahin et al, CFTC, 2008 

Across all maturities, the aggregate position of swap dealers in WTI crude oil futures contracts was only

marginally net long as of the end of June 2008 and was net short on average during the first five months 

of 2008. This means that swap dealers’ futures positions, on balance, were poised to benefit more from a 

fall in crude oil prices than from a rise in crude oil prices. 

Term Structure of Futures Prices

The term structure of futures prices depicts a series of prices for contracts that mature at given dates in

the future. It is similar to a yield curve for Treasury bonds in the way information is both presented and

interpreted. Futures are said to be in “contango” when prices rise with maturity and in “backwardation”

when prices fall with maturity. Over time, the whole term structure may shift upward or downward, as 

well as rotate.

Figure 13 presents a time series of the term structure of crude oil futures prices between March 2004 and 

May 2008. The solid red line depicts the evolution of the cash (spot) price of crude oil, while each dashed 

curves shows the terms structure of crude oil futures prices at selected points in time.

Commodity Futures Markets 23
ITF Interim Report on Crude Oil

Figure 13 Term Structure of Crude Oil Prices 

20

40

60

80

100

120

140

Mar‐03

Aug‐04

Dec‐05

Apr‐07

Sep‐08

Jan‐10

Jun‐11

Oct‐12

Price Per Barrel

Source: Energy Information Administration and the Commodity Futures Trading Commission. Prices for futures 

contracts shown are for liquid markets (1000 or more contracts). 

According to Figure 13, during the last four years, the term structure has been steadily shifting upward. 

With a few exceptions, futures prices have been mostly in backwardation, that is, distant prices have been 

lower than near-term prices. The shape of the term structure provides information about inventories to

market participants. Expectations of higher prices in the future are generally viewed as a signal to build 

up physical inventories. 

Crude oil inventories can also shed light on whether the price run-up depicted in Figure 13 reflects mostly 

fundamental supply and demand factors. Artificially high prices will create an imbalance between supply 

and demand that should lead to inventory accumulation. However, as shown in Figure 14, inventories of 

crude oil and petroleum products in the United States and in OECD countries have generally declined

over the past year. Based on these inventory figures, current prices, although high, are not prompting the 

inventory accumulation that would be associated with artificially high prices. 

Commodity Futures Markets 24
ITF Interim Report on Crude Oil

Figure 14 Private Crude Oil and Petroleum Product Inventories

Speculators and Market Prices: Assessing Contemporaneous Relations 

Correlations measure the strength and direction of a statistical relation between two variables. If changes 

in positions from one day to the next of any category of traders are associated with daily changes in prices,

then a pattern in contemporaneous correlations should emerge. Figure 15 presents a time series of

contemporaneous correlations between daily front month crude oil futures prices and daily net position

changes of different trader categories.9

According to the top half of Figure 15, during the past five and a half years, changes in commercial traders’ 

net positions have been largely negatively correlated with crude oil price changes (meaning that position

changes have moved in the opposite direction from price changes), albeit with a high degree of volatility 

over time. Non-commercial position changes, on the other hand, have been generally positively

correlated with price changes (meaning that position changes have moved in the same direction as price

changes).

9 Correlations displayed here represent the 30-day historical moving average correlations of position 

changes (by trader category) with price changes.

Commodity Futures Markets 25
ITF Interim Report on Crude Oil

Figure 15 Correlations between Changes in Prices and Changes in Net Positions

The bottom half of Figure 15 presents correlations for the largest two sub-categories of non-commercial

and commercial traders – hedge funds and swap dealers. Correlations between hedge fund position

changes and price changes (bottom right panel) largely mirror those of non-commercial traders in general 

(top right panel). In contrast, swap dealer correlations (bottom left panel) are significantly different,

centering around zero during the past five and a half years.

According to the above analysis, between 2003 and 2008, the correlations between position changes and

price changes tend to be quite variable. While it is true that the positions of non-commercial traders in 

general, and hedge funds in particular, often move in the same direction as prices, these correlations,

standing alone, do not provide definitive information about causation. Thus, further assessment of the

dynamic relations between position changes and price changes is warranted.

Commodity Futures Markets 26

Source: Commodity Futures Trading Commission
ITF Interim Report on Crude Oil

Commodity Futures Markets 27

Speculators and Market Prices: Assessing Dynamic Relations 

Proving causation between positions changes and market prices is a difficult task. A formal way to 

analyze the interaction between daily price changes and position changes is to examine directly whether 

various groups of traders change positions in advance of price changes.10

Intuitively, in order to realize gains from price changes, positions must be established prior to those price 

changes. Prices then may respond to those positions, or more precisely, the signal conveyed on 

establishing those positions. If specific trader categories were systematically establishing positions in 

advance of profitable price movements, then a pattern of position changes preceding price changes would 

emerge. Conversely, evidence of price changes leading position changes would suggest that some market 

participants actively adjust their positions to reflect new information. Price changes that systematically 

precede position changes indicate reactive behavior by a particular trading group. 

Figure 16 displays the analysis of daily price changes and position changes by various trader groups and 

combinations of trader groups between January 2003 and June 2008. Over the full time period, there is 

little evidence that daily position changes by any of the trader sub-categories systematically precede price 

changes. This result holds for all potential categories of speculators—for non-commercial traders in total, 

for hedge funds and swap dealers individually, and for the positions of non-commercial traders combined 

with swap dealers. 

This result is to be expected in a well-functioning market. In some circumstances, changes in positions of 

commercial participants (excluding swap dealers) occasionally have an impact on price changes (as they 

bring valuable information into the market), but there is no systematic evidence that changes in net 

positions of commercial traders systematically precede price changes. This result holds for all net 

position changes of commercial participants in the aggregate and for net position changes of 

manufacturers, producers, and commercial dealers. This result also holds for all net position changes of 

swap dealers. 

In fact, many trader groups are shown to adjust their positions in response to price changes over the full 

sample period, including commercial traders in the aggregate and manufacturers, commercial dealers, 

producers, and hedge funds individually. A reaction in the positive direction indicates that trader 

positions increase (decrease) following a price increase (decrease) on the previous day. A reaction in the 

negative direction indicates that trader positions decrease (increase) following a price increase (decrease) 

on the previous day. 

 

10 The formal tests employed here are known as Granger Causality tests. A technical description of the 

tests is given in the Appendix. Granger Causality tests were performed for different trader categories, 

over different holding periods, for different sample periods, in one and both directions. Trading activity 

in the nearby crude-oil contract averages about 50 percent of all trading activity and is a significant 

proportion of all open positions ranging from 18 to 30 percent of total open interest. Position changes are 

defined as changes in aggregated futures plus delta-adjusted options positions. Note that Granger 

Causality tests do not prove a causal relation between variables, only a statistical probability that, over a 

long enough period of time, one variable leads another. 
ITF Interim Report on Crude Oil

Commodity Futures Markets 28

Figure 16 Granger Causality Tests relating Daily Position Changes to Price Changes in the NYMEX 

WTI Crude Oil Futures Contract from January 2000 to June 2008 

Hypothesized Direction of Causality 

Price Changes lead Position 

Changes 

Position Changes lead Price 

Trader Classification Changes 

Direction Significant? P 

Value Direction Significant? P Value 

All Commercials (includes 

Manufacturers, Commercial 

Dealers, Producers, Other 

Commercial Traders, and 

Swap Dealers)

+ Yes 0.028 . No 0.896 

Manufacturers + Yes 0.048 . No 0.191 

Commercial Dealers + Yes 

0.040 

. No 0.908 

Producers + Yes 0.032 . No 0.449 

Other Commercial 

Traders . No 

0.918 

. No 0.391 

Swap Dealer . No 0.114 . No 0.832 

All Non-Commercials 

(includes Hedge Funds, Floor 

Brokers & Traders)

. No 0.062 . No 0.764 

Hedge Funds - Yes 0.003 . No 0.585 

Floor Brokers & 

Traders . No 0.741 . No 0.494 

All Non-Commercials 

 combined with 

 Swap Dealers

. No 0.062 . No 0.947 

Source: Commodity Futures Trading Commission 

These results are representative and have been subject to a variety of robustness checks. Importantly, the 

results remain qualitatively similar during the most recent price run-up between January 2006 and June 

2008. In addition, tests uncover no evidence that position changes by trader categories that might be 

deemed speculative are systematically leading price changes over 2-, 3-, 4- and 5-day intervals. 

While these statistical tests present the most complete examination to date of the relation between 

position changes and price changes, they – like all statistical tests – have some limitations. First, the 

analysis was performed for trader groups rather than individual traders. Consequently, these tests would 

not be able to detect if the positions of some traders within a trading category have much greater influence 

over prices than the positions of other traders in that category. Second, the tests utilize end of day 

position data. Thus, the tests may not capture any intraday position-price relationships. Finally, the tests 
ITF Interim Report on Crude Oil

Commodity Futures Markets 29

were performed on aggregated net position changes in the nearby contracts alone (defining nearby as the 

futures contract with the largest open interest). As a result, the tests do not reflect a systematic effect of 

position changes at different maturities on either the prices of the nearby futures contract or on the whole 

term structure of futures prices. 

That said, if the actions of particular groups of traders had systematically driven the recent oil price 

increases, the tests performed should have made it quite apparent. Again, it is useful to note that while 

the tests do not find that changes in daily positions systematically lead changes in prices, such a finding 

would not necessarily imply that position changes were responsible for the price changes. Nevertheless, 

the lack of significant position changes leading price changes is informative. 

Taken as a whole, these statistical correlations and tests are consistent with the view that current oil 

prices are being driven by fundamental supply and demand factors. 

ITF Interim Report on Crude Oil

Concluding Remarks 

In this interim report, the Interagency Task Force on Commodity Markets examined both fundamental

factors and trading activity in the crude oil futures market during the period January 2003 through June 

2008. 

Fundamentals have changed in important ways during the past few years. Demand for oil has shifted 

upward, reflecting strong economic growth in commodity-intensive, emerging market economies, notably 

China, India and the Middle East. Some nations provide subsidies that hold down fuel prices, thereby 

further boosting oil consumption. At the same time, supply has not kept pace. World oil production has 

increased only slightly over the past few years. Consequently, oil prices have risen to keep world oil 

consumption in line with production (the two must be equal aside from changes in inventories). As oil

demand is very insensitive to moves in oil prices in the near term, the rise in oil prices has been

disproportionately large in order to offset the robust, income-driven rise in demand. In addition, the 

decline in the foreign exchange value of the dollar also has contributed somewhat to the increase in the

dollar price of oil. 

These new demand and supply realities have contributed to an increased interest to participate in futures

markets. Commercial entities seeking to avoid exposure to changes in the prices of crude oil they will

purchase or sell are motivated to establish hedges. In addition, some participants perceive holding long 

crude oil futures positions as offering protection from further declines in the dollar. Still others utilize 

futures positions to ameliorate risk from their other portfolio holdings. 

A robust increase in trading activity in the crude oil futures market had largely occurred during the same 

time that the price of crude oil was rising. This prompted a need to examine if the behavior of some

market participants had a possible impact on the price of crude oil. This study examined whether there is 

any statistically significant evidence that the trading activity of commercial and non-commercial traders

and their sub-categories—commercial producers, commercial manufacturers, commercial dealers, swap

dealers, hedge funds, and floor brokers and traders—had a systematic influence on the price of crude oil. 

To date, there is no statistically significant evidence that the position changes of any category or subcategory of traders systematically affect prices. This is to be expected in well-functioning markets. On the 

contrary, there is evidence that non-commercial entities alter their position following price changes. This 

is also expected because new prices convey information affecting the prospects and the risks of those 

entities. This being an interim report, the Task Force intends to examine these findings further as it 

continues its work. However, to this point of the examination, the evidence supports the position that

changes in fundamental factors provide the best explanation for the recent crude oil price increases.

Observed increases in the speculative activity and the number of traders in the crude oil futures market do 

not appear to have systematically affected prices. 

Moreover, if speculative activity has pushed oil prices above the levels consistent with physical supply and 

demand, increases in inventories should emerge as higher prices reduce consumption and investment in

productive capacity is encouraged. Although this process may take time to unfold, inventories of crude oil 

and petroleum products, according to available data, have declined significantly over the past year. The 

view that financial investors have pushed prices above fundamental values is also difficult to square with 

the fact that prices for other commodities that do not trade on established futures markets (such as coal, 

steel, and onions) have risen sharply as well. 

Concluding Remarks 31
ITF Interim Report on Crude Oil

The Task Force will continue its examination of the dynamics of the crude oil futures market and other 

commodity markets and will report further on its work later this year.11

 

11 In June 2008, the CFTC issued requests for disaggregated information – Special Calls – to swap dealers 

and commodity index traders. Data submitted in response to the special calls is expected to enable a

detailed analysis of index trading and over-the-counter swaps across a wide variety of futures markets.

This analysis, in turn, would enable the CFTC to gauge the effectiveness of current rules and regulations 

governing the dynamics of futures markets. 

Concluding Remarks 32
ITF Interim Report on Crude Oil

Appendix

Granger Causality Tests 

A formal way to statistically test for whether one variable leads another are known as Granger Causality 

tests (see Granger, C. W. J., 1969, Investigating causal relations by econometric models and cross-spectral 

methods, Econometrica 37, 424-438).

Granger Causality tests reported above are performed by employing bivariate regressions in the form of 

where Ʃp is the change in nearby price; ƩNP is the change in net nearby positions of the specific trader 

category; and l is the optimal lag chosen. Applying the Akaike Information Criterion, one lag in each

equation was found to be sufficient.

The first equation asks whether changes in net positions at the end of each reporting day reliably predict 

changes in settlement prices given the prior change in settlement price. The second equation asks

whether changes in settlement price reliably predict changes in end-of-day net positions given the prior 

change in positions.

The test is whether the variance of residuals from the respective unrestricted equation is significantly less 

than the variance of residuals from the corresponding restricted equation.

Results utilize 1378 daily price change and position change observations sampled from January 1, 2003 

through June 30, 2008. Position changes are defined by net daily position changes in the nearby futures

plus delta-adjusted options contract. P-values are reported for F-tests and indicate probabilities that the

variance of residuals from the respective unrestricted equation differs from the variance of the

corresponding restricted equation.

Appendix 33

NPt l t l l t l t NP p

ll

= +  + + 

= =

  0   

1 1

Microsoft Equation Editor 

  = =

= +  +  +

k

l

k

l

t l t l l NPt l t p p

1 1

0    

  = =

= +  +  +

k

l

k

l

t l t l l t l t NP NP p

1 1

 0   

MATH Type 

0

1 1

0

1 1

k k

t l t l l t l t

l l

k k

t l t l l t l t

l l

p p NP

NP NP p

   	

   

 

= =

 

= =

= + + +

= + + +

 

 

ITF Interim Report on Crude Oil

Glossary of Futures Markets Terms 

Backwardation: Market situation in which futures prices are progressively lower in the distant delivery 

months. (Backwardation is the opposite of contango).

Bid: An offer to buy a specific quantity of a commodity at a stated price. 

Board of Trade: Any organized exchange or other trading facility for the trading of futures and/or

option contracts. 

Cash Market: The market for the cash commodity (as contrasted to a futures contract) taking the form 

of either an organized, self-regulated central market (e.g., a commodity exchange) or a decentralized overthe-counter market. 

CFTC Form 40: The form used by large traders to report their futures and option positions and the 

purposes of those positions. 

Clearing: The procedure through which the clearing organization becomes the buyer to each seller of a

futures contract or other derivative, and the seller to each buyer for clearing members. 

Clearing Member: A member of a clearing organization. All trades of a non-clearing member must be 

processed and eventually settled through a clearing member. 

Clearing Organization or Clearing House: An entity through which futures and other derivative

transactions are cleared and settled. It is also charged with assuring the proper conduct of each contract’s

delivery procedures and the adequate financing of trading. A clearing organization may be a division of a 

particular exchange, an adjunct or affiliate thereof, or a freestanding entity. 

Commercial: A trader involved in the production, processing, or merchandising of a commodity. 

Commitments of Traders Report (COT): A weekly report from the CFTC providing a breakdown of 

each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the 

reporting levels established by the CFTC. Open interest is broken down by aggregate commercial, noncommercial, and non-reportable holdings. 

Commodity Index: An index or average, which may be weighted, of selected commodity prices,

intended to be representative of the markets in general or a specific subset of commodities, e.g., grains or

livestock. 

Commodity Pool Operator (CPO): A person engaged in a business similar to an investment trust or a

syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity 

futures contracts or commodity options and who generally must register with the CFTC as a CPO. 

Commodity Swap: A swap in which the payout to at least one counterparty is based on the price of a

commodity or the level of a commodity index. 

Contango: Market situation in which prices in succeeding delivery months are progressively higher than

in the nearest delivery month; the opposite of backwardation. 

Counterparty: The opposite party in a bilateral agreement, contract, or transaction, such as a swap. 

Day Trader: A trader who takes positions and then offsets them during the same trading session prior 

to the close of trading. 

Glossary of Futures Markets Terms 35
ITF Interim Report on Crude Oil

Dealer/Merchant (AD): A large trader that declares itself a “Dealer/Merchant” on CFTC Form 40,

which provides as examples “wholesaler, exporter/importer, shipper, grain elevator operator, crude oil 

marketer.” 

Derivative: A financial instrument, traded on or off an exchange, the price of which is directly 

dependent upon (i.e., "derived from") the value of one or more underlying securities, equity indices, debt 

instruments, commodities, other derivative instruments, or any agreed upon pricing index or

arrangement (e.g., the movement over time of the Consumer Price Index or freight rates). Derivatives 

involve the trading of rights or obligations based on the underlying product, but do not directly transfer 

property. They are used to hedge risk or to exchange a floating rate of return for fixed rate of return. 

Derivatives include futures, options, and swaps. For example, futures contracts are derivatives of the 

physical contract and options on futures are derivatives of futures contracts. 

Electronic Trading Facility: A trading facility that operates by an electronic or telecommunications

network instead of a trading floor and maintains an automated audit trail of transactions. 

Eligible Commercial Entity: An eligible contract participant or other entity approved by the CFTC 

that has a demonstrable ability to make or take delivery of an underlying commodity of a contract; incurs

risks related to the commodity; or is a dealer that regularly provides risk management, hedging services, 

or market-making activities to entities trading commodities or derivative agreements, contracts, or

transactions in commodities. 

Eligible Contract Participant: An entity, such as a financial institution, insurance company, or

commodity pool, that is classified by the Commodity Exchange Act as an eligible contract participant 

based upon its regulated status or amount of assets. This classification permits these persons to engage in

transactions (such as trading on a derivatives transaction execution facility) not generally available to

non-eligible contract participants, i.e., retail customers. 

Exchange-Traded Fund (ETF): An investment vehicle holding an asset such as a commodity that 

issues shares that are traded like a stock on a securities exchange. 

Exempt Commercial Market: An electronic trading facility that trades exempt commodities on a 

principal-to-principal basis solely between persons that are eligible commercial entities. 

Floor Broker: A person with exchange trading privileges, who, in any pit, ring, post, or other place 

provided by an exchange for the meeting of persons similarly engaged, executes for another person any 

orders for the purchase or sale of any commodity for future delivery. 

Foreign Board of Trade: A futures exchange located outside the United States. 

Forward Contract: A cash transaction common in many industries, including commodity

merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and 

quantity of goods at a specified future date. Terms may be more “personalized” than is the case with

standardized futures contracts (i.e., delivery time and amount are as determined between seller and

buyer). A price may be agreed upon in advance, or there may be agreement that the price will be

determined at the time of delivery. 

Futures Commission Merchant (FCM): Individuals, associations, partnerships, corporations, and 

trusts that solicit or accept orders for the purchase or sale of any commodity for future delivery on or 

subject to the rules of any exchange and that accept payment from or extend credit to those whose orders 

are accepted.

Glossary of Futures Markets Terms 36
ITF Interim Report on Crude Oil

Futures Contract: An agreement to purchase or sell a commodity for delivery at a specified time in the 

future: (1) at a price that is determined at initiation of the contract; (2) that obligates each party to the 

contract to fulfill the contract at the specified price; (3) that is used to assume or shift price risk; and (4) 

that may be satisfied by delivery or offset. 

Hedge Exemption: An exemption from speculative position limits for bona fide hedgers and certain

other persons who meet the requirements of exchange and CFTC rules. 

Hedge Fund: A private investment fund or pool that trades and invests in various assets such as 

securities, commodities, currency, and derivatives on behalf of its clients, typically wealthy individuals. 

Hedger: A trader who enters into a position in a futures market opposite to a position held in the cash

market to minimize the risk of financial loss from an adverse price change; or who purchases or sells 

futures as a temporary substitute for a cash transaction that will occur later. One can hedge either a long 

cash market position (e.g., one owns the cash commodity) or a short cash market position (e.g., one plans 

on buying the cash commodity in the future). 

Hybrid Instruments: Financial instruments that possess, in varying combinations, characteristics of 

forward contracts, futures contracts, option contracts, debt instruments, bank depository interests, and

other interests. Certain hybrid instruments are exempt from CFTC regulation. 

Large Traders: A large trader is one who holds or controls a position in any one future or in any one

option expiration series of a commodity on any one exchange equaling or exceeding the exchange or 

CFTC-specified reporting level. 

Liquidity: An aspect of a market indicating that selling and buying can be accomplished with minimal

effect on price. The more liquid a market is, the easier it is to execute large trades with minimal price 

impact. 

Long: (1) One who has bought a futures contract to establish a market position; (2) a market position

that obligates the holder to take delivery; (3) one who owns an inventory of commodities. 

Managed Money Traders (MMTs): Futures market participants who engage in futures trades on

behalf of investment funds or clients. While MMTs are commonly equated with hedge funds, they may 

include Commodity Pool Operators and other managed accounts as well as hedge funds. While CFTC

Form 40 does not provide a place to declare oneself a Managed Money Trader, a large trader can declare 

itself a “Hedge Fund (H)” or “Managed Accounts and Commodity Pools.” 

Manufacturer (AM): A large trader that declares itself a “Manufacturer” on CFTC Form 40, which 

provides as examples “refiner, miller, crusher, fabricator, sawmill, coffee roaster, cocoa grinder.” In the

crude oil and product futures and option markets, Manufacturers are likely to be refiners. 

Margin: The amount of money or collateral deposited by a customer with his broker, by a broker with a

clearing member, or by a clearing member with a clearing organization. The margin is not partial 

payment on a purchase. Also called Performance Bond. (1) Initial margin is the amount of margin 

required by the broker when a futures position is opened; (2) Maintenance margin is an amount that must

be maintained on deposit at all times. If the equity in a customer's account drops to or below the level of 

maintenance margin because of adverse price movement, the broker must issue a margin call to restore 

the customer's equity to the initial level. Exchanges specify levels of initial margin and maintenance 

margin for each futures contract, but futures commission merchants may require their customers to post 

margin at higher levels than those specified by the exchange. 

Glossary of Futures Markets Terms 37
ITF Interim Report on Crude Oil

Market Maker: In the futures industry, a trader who, in speculating for his own account, provides bids

and offers for commercial users of the market. 

Nearbys: The nearest delivery months of a commodity futures market. 

Nearby Delivery Month: The month of the futures contract closest to maturity. 

Non-commercial: A trader other than a commercial, that is, a trader that is not involved in the 

production, processing, or merchandising of the commodity it is trading. 

Offer: An indication of willingness to sell at a given price; opposite of bid, the price level of the offer may 

be referred to as the “ask.” 

Offset: Liquidating a purchase of futures contracts through the sale of an equal number of contracts of 

the same delivery month, or liquidating a short sale of futures through the purchase of an equal number of 

contracts of the same delivery month. 

Open Interest: The total number of futures contracts long or short in a delivery month or market that

has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery. 

Option: A contract that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a 

specified quantity of a commodity or other instrument at a specific price within a specified period of time,

regardless of the market price of that instrument. 

Over-the-Counter (OTC): The trading of commodities, contracts, or other instruments not listed on 

any exchange. OTC transactions can occur electronically or over the telephone. 

Position Accountability: A rule adopted by an exchange requiring persons holding a certain number

of outstanding contracts to report the nature of the position, trading strategy, and hedging information of 

the position to the exchange, upon request of the exchange. See Speculative Position Limit. 

Position Limit: See Speculative Position Limit. 

Price Discovery: The process of determining the price level for a commodity based on supply and 

demand conditions. Price discovery may occur in a futures market or cash market. 

Producer (AP): A large trader that declares itself a “Producer” on CFTC Form 40, which provides as

examples, “farmer” and “miner.” A firm that extracts crude oil or natural gas from the ground would also 

be considered a Producer. 

Reporting Level: Sizes of positions set by the exchanges and/or the CFTC at or above which 

commodity traders or brokers who carry these accounts must make daily reports about the size of the 

position by commodity, by delivery month, and whether the position is controlled by a commercial or

non-commercial trader. 

Scalper: A speculator who buys and sells rapidly, with small profits or losses, holding his positions for 

only a short time during a trading session. Typically, a scalper will stand ready to buy at a fraction below

the last transaction price and to sell at a fraction above, e.g., to buy at the bid and sell at the offer or ask 

price, with the intent of capturing the spread between the two, thus creating market liquidity.

Short: (1) The selling side of an open futures contract; (2) a trader whose net position in the futures

market shows an excess of open sales over open purchases. 

Glossary of Futures Markets Terms 38
ITF Interim Report on Crude Oil

Special Call: A request pursuant to CFTC Regulation 18.05 for further details regarding a large trader’s 

futures and cash market positions. 

Speculative Position Limit: The maximum position, either net long or net short, in one commodity

future (or option) or in all futures (or options) of one commodity combined that may be held or controlled 

by one person (other than a person eligible for a hedge exemption) as prescribed by an exchange and/or 

by the CFTC.

Speculator: In commodity futures, a trader who does not hedge, but who trades with the objective of

achieving profits through the successful anticipation of price movements. 

Spot: Market of immediate delivery of and payment for the product. 

Spot Commodity: (1) The actual commodity as distinguished from a futures contract; (2) sometimes 

used to refer to cash commodities available for immediate delivery. 

Spot Month: The futures contract that matures and becomes deliverable during the present month. 

Spot Price: The price at which a physical commodity for immediate delivery is selling at a given time 

and place. 

Spread: The purchase of one futures delivery month against the sale of another futures delivery month 

of the same commodity; the purchase of one delivery month of one commodity against the sale of that

same delivery month of a different commodity; or the purchase of one commodity in one market against

the sale of the commodity in another market, to take advantage of a profit from a change in price 

relationships. The term spread is also used to refer to the difference between the price of a futures month

and the price of another month of the same commodity. A spread can also apply to options. 

Swap: In general, an OTC contract for the exchange of one asset or liability for a similar asset or liability

for the purpose of lengthening or shortening maturities or otherwise shifting risks. See Commodity

Swap. 

Swap Dealer (AS): An entity such as a bank or investment bank that markets swaps to end users. 

Swap dealers often hedge their swap positions in futures markets. Alternatively, an entity that declares

itself a “Swap/Derivatives Dealer” on CFTC Form 40. 

Yield Curve: A graphic representation of market yield for a fixed income security plotted against the 

maturity of the security. The yield curve is positive when long-term rates are higher than short-term

rates. 

Glossary of Futures Markets Terms 39

Notes
Notes
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