JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY

RICE UNIVERSITY

WHO IS IN THE OIL FUTURES MARKET

AND HOW HAS IT CHANGED?

BY

KENNETH B. MEDLOCK III

JAMES A. BAKER, III, AND SUSAN G. BAKER FELLOW IN ENERGY AND RESOURCE ECONOMICS

JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY

RICE UNIVERSITY

AND

AMY MYERS JAFFE

WALLACE S. WILSON FELLOW IN ENERGY ECONOMICS

JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY

RICE UNIVERSITY

AUGUST 26, 2009
Who Is In the Oil Futures Market and How Has It Changed?

2

THESE PAPERS WERE WRITTEN BY A RESEARCHER (OR RESEARCHERS) WHO PARTICIPATED IN A

BAKER INSTITUTE RESEARCH PROJECT. WHEREVER FEASIBLE, THESE PAPERS ARE REVIEWED BY

OUTSIDE EXPERTS BEFORE THEY ARE RELEASED. HOWEVER, THE RESEARCH AND VIEWS

EXPRESSED IN THESE PAPERS ARE THOSE OF THE INDIVIDUAL RESEARCHER(S), AND DO NOT

NECESSARILY REPRESENT THE VIEWS OF THE JAMES A. BAKER III INSTITUTE FOR PUBLIC

POLICY.

© 2009 BY THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY OF RICE UNIVERSITY

THIS MATERIAL MAY BE QUOTED OR REPRODUCED WITHOUT PRIOR PERMISSION,

PROVIDED APPROPRIATE CREDIT IS GIVEN TO THE AUTHOR AND

THE JAMES A. BAKER III INSTITUTE FOR PUBLIC POLICY.
Who Is In the Oil Futures Market and How Has It Changed?

3

I. Introduction1

Leading up to 2008, oil prices experienced a steady, upward trend. Then, in 2008 oil prices 

climbed to unprecedented highs of $147 per barrel in July, only to fall dramatically in a very 

short period of time to a low of $30 per barrel in December 2008 (see Figure 1). Since the end of 

2008, oil prices have risen in 2009 and are now near $70 per barrel. The relatively recent 

dramatic movement in oil price has caused everyone from U.S. congressmen to ministers from 

the Organization of the Petroleum Exporting Countries (OPEC) to call into question the role of 

speculative traders in the crude oil market. The Commodity Futures Trading Commission 

(CFTC), the main regulator of U.S. oil futures markets, recently announced that a new review of 

the role of speculators in oil futures markets trading would be forthcoming in late August. Early 

reports indicate that the CFTC, in its new study, is likely to pin oil price swings more squarely on 

speculative index trading. The Obama administration has already indicated that it will pursue 

greater regulation of the market and is negotiating with the United Kingdom about possible 

coordination. 

While the question of what has produced sharp swings in oil prices since 2005 is a complex one 

that requires further and deeper study, there are inescapable facts that need to be part of the 

debate about regulating the activities of institutions betting on movements in oil price purely for 

financial gain.2 Specifically, noncommercial traders—who the CFTC designates as any 

reportable trader who is not using futures contracts to hedge—have increased their footprint in 

the marketplace dramatically since the late 1990s. Hedgers are typically producers and 

consumers of the physical commodity who use futures markets to offset price risk. By contrast, 

noncommercial traders seek profits by taking market positions to gain from changes in the 

commodity price, but are not involved in the physical receipt/delivery of the commodity. These 

financial players—generally referred to as “speculators”—have come to account for a 

significantly greater proportion of activity in the U.S. oil futures markets than physical players in 

the oil industry in recent years. In addition, trading strategies of some financial players in oil 

appear to be influencing the correlation between the value of the U.S. dollar and the price of oil. 

 1 The authors would like to thank Megan Buckner, Energy Forum research intern, for her assistance on this project. 2 The Baker Institute will be releasing a longer, broader study of this topic in autumn 2009 that includes more

comprehensive analysis of the impact on historical oil price movements.
Who Is In the Oil Futures Market and How Has It Changed?

4

Moreover, we contend that the observed trading behaviors were supported during the 2000s by 

the policies surrounding the way governments approached the use of strategic government oil 

stocks. 

This brief paper investigates the composition of traders in the oil futures market and how this 

composition has changed in recent years. We also elucidate new trends in financial currency and 

commodity price movements and quantify dramatic changes in dollar-oil correlations. 

Specifically, we address the core questions of whether speculative trading in oil has increased 

and whether the link between dollar and oil-related financial contracts has strengthened in the 

last several years. Finally, we discuss the interaction between these observed market trends and 

policies regarding the use of strategic government-held oil stocks. 

Figure 1: Crude Oil Price (WTI, Daily – 01/02/90 through 08/19/09)

Source: Energy Information Administration

A study of the changing composition of oil market participants and dollar-oil links is important 

in understanding the role of oil in U.S. economic and national security. It has been postulated 

that oil-linked index funds became an asset class for investors wanting to escape the falling 
Who Is In the Oil Futures Market and How Has It Changed?

5

dollar and weakening stock market, adding to the speculative fervor in oil and causing even more 

damage to the U.S. economy. In 2008, U.S. oil imports totaled more than $331 billion. This 

represents an increase of 300 percent from 2002. Moreover, the U.S. oil import bill accounted for 

as much as 47 percent of the overall U.S. trade deficit in 2008, compared to only 19 percent in 

2002. This rising financial burden contributed to the ongoing challenges for the U.S. economy 

from 2006 through 2008, and has put pressure on the U.S. dollar. 

In the review of data in this brief paper, we find that noncommercial players now constitute 

about 50 percent of those holding outstanding positions in the U.S. oil futures market, compared 

to an average of about 20 percent prior to 2002 (see Figure 2). The change in market composition 

was driven by the rapid entry of noncommercial participants and was the principle factor behind 

the increase in total open interest. It is also highly correlated with the run-up in oil prices. 

Moreover, as will be expounded below, there appears to have been a substantial change 

following the passage of the Commodity Future Modernization Act (CFMA) in December 2000.

Figure 2: Market Composition, Open Interest, and the Price of Oil

Source: Energy Information Administration, CFTC Commitment of Traders Reports
Who Is In the Oil Futures Market and How Has It Changed?

6

We also find that the correlation between movements in oil prices and the value of the dollar 

against the trade-weighted index of the currencies of foreign countries has increased to 0.82 (a 

significant measure) for the period between 2001 and the present day, compared to a previously 

insignificant correlation of only 0.08 between 1986 and 2000. 

Recent shifts in the composition of oil market participation and dollar-oil correlations also 

correspond to changes in the manner of regulation of commodity markets such as those 

implemented with the CFMA. As noted in a 2007 U.S. Government Accountability Office 

report, the new legislation made it easier for financial players to obviate speculative limits and 

made it more difficult for the CFTC to regulate oil futures markets.3 Changes at the London 

International Petroleum Exchange (IPE), which is now the Intercontinental Commodities 

Exchange (ICE), regarding U.S. delivery-based contracts also created problems with monitoring 

and limiting speculative activity since these contracts were outside the jurisdiction of the CFTC.

II. Oil Futures Markets: Who Trades and Why?

In the aftermath of the 1973 oil crisis, a wide array of financial tools were employed to allow 

industry players to manage and diversify price risk and to help raise capital in innovative ways. 

The widespread adoption of these risk management products, which were fashioned after similar 

products that had been used successfully in foreign exchange and agricultural commodity 

markets, helped promote market transparency and greater liquidity in oil trading. 

Formal exchanges—where contracts for delivery of oil in future months can be bought and 

sold—serve as “clearing houses” that ensure the integrity of financial transactions of all 

participants through daily margin requirements on open positions and other mechanisms. In point 

of fact, only a small volume of oil contracts traded in these exchanges result in physical delivery. 

Rather, most traders who open positions will typically close them prior to expiry with the goal of 

profiting in the transaction. Growth in the use of financial instruments explicitly linked to oil has 

aided in price discovery by bringing openly accessible, readily available information about 

 3 U.S. Government Accountability Office, Trends in Energy Derivatives Markets Raise Questions about CFTC

Oversight, GAO 08-25, October 2007. Available at: http://www.gao.gov/products/GAO-08-174T.
Who Is In the Oil Futures Market and How Has It Changed?

7

current and expected future market conditions into the market price. This has, in turn, helped 

establish more transparency in the global crude oil market. These financial instruments have 

allowed market participants to hedge, or shed risk, against unexpected price movements, which 

can be a very important function for firms engaged in exploration and production or the refining 

and marketing of oil products. But, for the function of risk shedding to be facilitated, there must 

be participants willing to accept risk. These participants are the so-called “speculators,” who 

despite being much maligned recently, serve an important role in the proper functioning of these 

financial markets. 

The first widely traded oil financial contract to be sold through an organized, regulated exchange 

was a heating oil futures contract offered on the New York Mercantile Exchange (NYMEX) in 

1978. The heating oil contract gained in popularity and was followed by other successful oil 

futures contracts, including the introduction of U.S. West Texas Intermediate crude oil futures in 

1983. By 1990, there were 10 active oil futures contracts trading worldwide, with a combined 

daily volume equivalent to 150 million barrels a day, or 130 percent more than oil demand at the 

time. Today, total NYMEX oil futures trading activity represents the equivalent of 600 million 

barrels, which is about seven times the daily volume of current oil demand. 

Trading participants on the NYMEX are categorized into two basic categories: (1) commercial 

traders, including both producers and consumers, who trade in futures to offset the risk of price 

moving unfavorably for their ongoing business activities and (2) noncommercial traders, 

including speculators and financial institutions, who seek profit on paper positions from shortterm changes in price. Both types are needed for the exchange to function well. For example, an 

oil producer can hedge against declines in oil price by selling oil futures contracts (taking a short 

position) on the exchange in light of its physical oil position, which is naturally long. If oil prices 

fall over time, the producer can offset losses in its physical business by taking profits on his short 

financial position in the futures market. If the oil price rises instead, the profits from the physical 

sale of oil are offset by losses from holding the futures contract. In either case, the producer is 

neutral to price changes. In order to facilitate such moves in a more efficient manner, there must 

be a willing counterparty in a liquid market. Speculators serve this role by acting not only as 

potential counterparties, but also as market participants who trade frequently, thus increasing 
Who Is In the Oil Futures Market and How Has It Changed?

8

liquidity. But recently, there have been questions about how large the market presence of 

speculators should be to facilitate the smooth operation of markets. 

Rules for speculative position limits were historically much stricter than they are today. 

Moreover, despite rhetoric that imposing stricter limits would harm market liquidity, there is no 

evidence to support such claims, especially in light of the fact that the market was functioning 

very well prior to 2000, when speculative limits were tighter. 

In practice, speculative position limits have been widely used in commodity markets for more 

than 50 years. These limits are set in order to avoid excessive speculation and market 

manipulation. According to CFTC regulations, only positions which are “bona-fide hedges” are 

exempt from limits. The Commodity Exchange Act (CEA) stipulated that futures contracts must 

be traded on a CFTC-regulated exchange, unless a statutory exclusion or regulatory exemption 

was legislated.4 The philosophy of exemptions for hedging is grounded in the notion that a 

physical market position gives hedgers less incentive to manipulate financial market prices due 

to their natural offsetting position in the physical market. 

The Commodity Futures Modernization Act (CFMA) of 2000 effectively cleared the way for 

more lax regulation of new oil risk management products, including index funds and price 

swaps, setting the stage for a rapid increase in financial players’ participation in over-the-counter 

(OTC) markets. The CFMA was approved by Congress on December 15, 2000, and signed into 

law by President Clinton six days later. It is particularly important because it designated certain 

OTC derivatives transactions (including those involving oil) to be outside of the jurisdiction of 

the CFTC. Thus, the CFMA made it easier for financial players to obviate speculative limits by 

creating a “loophole” that exempted certain participants from speculative position limits and 

other regulations due to their involvement in OTC markets or electronic trading platforms—such 

as ICE or the now- extinct Enron Online.5 These exchanges are managed chiefly by financial 

institutions and companies who provide “risk management services” but are not primarily oil 

producers or consumers in the physical oil market. Additional problems with monitoring and 

 4 Dean Kloner, “The Commodity Futures Modernization Act of 2000,” Commodity Futures 29 ( 2001). 5 Trends in Energy Derivatives Markets, U.S. Government Accountability Office, October 2007.
Who Is In the Oil Futures Market and How Has It Changed?

9

limiting speculative activity subsequently emerged with the formation of foreign exchanges that 

allowed contracts that could be settled by physical delivery within the United States but are 

outside the jurisdiction of the CFTC because they are offered on foreign exchanges (the so-called 

“London Loophole”). 

Importantly, the CFMA also removed swap transactions from the reach of the CEA, thus making 

them exempt from speculative position limits established by the CFTC.6 This so-called “swaps 

loophole” has allowed institutional investors to take larger positions than if they were just buying 

futures contracts directly on the exchange, where they would have been constrained by 

speculative position limits. In a swap, a floating price is exchanged for a fixed price, with 

financial settlement that only requires the payment of the net transaction difference between the 

two (the so-called “contract for differences”).

Composition of Market Players Following Regulatory Changes

An analysis of trends in open interest in the U.S. crude oil futures contract—as detailed in the 

commitment of traders reports obtained from the CFTC—shows that the proportion of open 

contracts held by noncommercial players increased sharply in the last few years (see Figure 3). 

Notably, this also means that the percentage share of open contracts held by commercial entities 

decreased. While market share is a notable feature, the absolute trends behind the shares are also 

important. In particular, although the market position of commercial traders did increase in 

absolute size (approximately double), noncommercial traders increased their market presence 

over 15-fold, largely due to increased use of spread trading (see Figure 4). 

 6 Interestingly, the CFMA also stipulated that the CEA not apply to any “excluded commodity,” which is defined to

include, among other things,

1. an interest rate, exchange rate, currency, security, security index, credit risk or measure, debt or equity

instrument, index or measure of inflation, or other macroeconomic index or measure;

2. any other rate, differential, index, or measure of economic or commercial risk, return, or value that is either

(A) not based in substantial part on the value of the narrow group of commodities not described in clause 1

above or (B) based solely on one or more commodities that have no cash market;

3. any economic or commercial index based on prices, rates, values, or levels that are not within the control of

any party to the relevant transaction; or

4. an occurrence, extent of an occurrence, or contingency (other than a change in the price, rate, value, or

level of a commodity not described in clause 1), that is (A) beyond the control of the parties to the relevant

transaction and (B) associated with a financial, commercial, or economic consequence.

(Excerpt taken from Kloner, Commodity Futures, Vol. 29, 2001)

Note, it can be argued that the CFMA set the stage for the credit default swap fiasco that has been tied to the current

economic and financial crisis.
Who Is In the Oil Futures Market and How Has It Changed?

10

Figure 3: Market Composition

Source: CFTC Commitment of Traders Reports

Note: These data include all open interest, inclusive of future, options and spreads. The data also account for

nonreported positions. Exclusion of the non-reportable positions pushes the noncommercial market share into the

low 60 percent range at its peak.

Open interest is the number of open contracts held active at any given time. As can be seen in 

Figure 3, the share of open contracts held by noncommercial players averaged approximately 20 
Who Is In the Oil Futures Market and How Has It Changed?

11

percent of total open interest through the early part of this decade. However, this dramatically 

increased to more than 55 percent of total open interest at its maximum in 2008, which coincided 

with the peak in crude oil price. 

Figure 4: Noncommercial Open Interest by Type of Contract

Source: CFTC Commitment of Traders Reports

Furthermore, and perhaps even more striking, the open interest of noncommercial players moves 

from a lagging indicator of price to a leading indicator of price around January 2006. An 

explanation for this can be tied to the market presence of noncommercials. If, for example, 

noncommercial players are more apt to expect prices to move up, then, as they become a greater 

share of the market, the weighted-average market expectation will preponderantly become more 

optimistic about a price rise since a larger percentage of players believe that prices will rise in 

the future. This can, in turn, lead to a self-fulfilling prophecy, at least for short periods of time. 
Who Is In the Oil Futures Market and How Has It Changed?

12

Only when high prices cause demand to wane and supplies to grow, leading to inventory 

buildup, will physical market realities reassert themselves.7

In Figure 5, the net position of noncommercial traders is plotted along with the oil price. For the 

series labeled “net open position,” positive numbers indicate a net long position. Generally, 

movements in price over the last few years have coincided with trends in open interest by 

noncommercial traders. We can see that during periods where speculators have been net short, 

prices typically declined, even if only slightly. When speculators are net long, the general shift in 

the market has been upward, in some cases to a dramatic extent. Some exceptions have occurred 

when speculators were generally in a net long position but were moving to liquidate positions. In 

this case, such as the late spring/early summer of 2008, prices responded by moving sharply 

lower. 

 7 This, in fact, can be a problem. Supplies are typically slow to materialize as there is a lead time involved in finding

and developing new resources. So, to the extent that excess production capacity is not held, it may appear to those

without a real stake in the physical market that supplies are indeed not increasing. Or, in a case where paper prices

are rising but physical oil holders cannot find actual buyers, inventory may not accumulate quickly on land, but may

emerge as a rising number of slow-steaming, floating cargoes at sea, the presence of which is less transparent to

financial market players than to physical oil traders. A rise in the number of floating cargoes was apparent in the

spring of 2008, but was generally not well understood by financial players. Such disconnects between perceptions

and reality can lead to short-lived but erroneous predictions of $200 oil that feed a temporary market frenzy. Not

until physical producer responses are actually apparent to all players will the “bubble” pop. In the 1980s and 1990s,

this disconnect between the market information of financial players versus physical market participants might have

been a smaller factor in overall market direction perceptions because noncommercial players had a significantly

smaller share of the market and thereby their perceptions might have been less influential on short term market

direction. When commercial players, or those with a physical presence (asset holders), represented a larger share of

the market, their ability to be better versed in the realities of the physical market meant the connection between

physical market trends and market expectations were better tempered.
Who Is In the Oil Futures Market and How Has It Changed?

13

Figure 5: Oil Price and Net Position of Noncommercials

Source: Energy Information Administration, CFTC Commitment of Traders Reports

Generally speaking, speculators have been net long since the middle of 2003, just as prices began 

to rise consistently year after year. So, as the market presence of noncommercial traders 

increased between 2003 to early 2008, the stance of these noncommercial traders has fairly 

consistently been to hold bullish, long positions that supported rising prices. And, when their 

market share was highest, so was their net long position, which again roughly coincided (acting 

as a slight leading indicator) with the peak in oil prices at $147 a barrel in the middle of 2008 

(see Figure 5).

Despite the trends evident in Figures 2 through 5, the CFTC, which is constantly analyzing 

market variables in effort to detect abnormalities, did not find any evidence in that the behavior 

of any single group of traders was creating a problem. In fact, CFTC chairman Walter Lukken 

told a committee of the U.S. House of Representatives in 2008 that CFTC analysis “did not find 

direct evidence that speculation was driving up (commodity) prices.” This statement is not 

surprising in light of the time-series techniques employed by the CFTC. Specifically, the CFTC’s 

own studies looked for extreme changes in the volatility of price using ARCH and GARCH 
Who Is In the Oil Futures Market and How Has It Changed?

14

models.8 The CFTC found that such extreme changes in price volatility were not evident in the 

data. However, the volatility of time-series data need not exhibit any clustering or significant 

changes for the market to be influenced by the trading behaviors of a large group of participants. 

Shifting aggregate expectations due to relatively tight short-term fundamentals and changing 

composition of market participants are not aspects the CFTC normally examines, and these 

factors are indeed essential to the proper analysis of the question of the role of speculators in 

price formation. Thus, it can be argued that the models employed were not adequate to answer 

the types of questions being asked.9

While correlation does not imply causation, the trends evident in the open interest data are 

impossible to ignore. It is striking that only after the CFMA was enacted did the composition of 

players in the market significantly change and oil prices rise to unprecedented highs. However, 

analysis must also take into account that the physical crude oil market had to be tight in order for 

speculative activity to be able to exert such extensive upward pressure on price. Thus, a more 

complete discussion of the physical characteristics of the market and its interactions with 

speculative trader behavior is needed for a more conclusive analysis. This more comprehensive 

Baker Institute study, authored by Kenneth Medlock, will be forthcoming later this fall. 

III. The Dollar and Oil: The Downside to Correlations

A high oil price can contributed to a weakening of the dollar, through mounting trade deficits 

and U.S. debt.10 In 2007 and 2008, dramatically rising oil prices fed the U.S. trade deficit leading 

to increased U.S. indebtedness. This, in turn, contributed to an even weaker dollar, which further 

drove oil prices higher in a self-perpetuating pattern. Oil-linked index funds became an asset 

class for investors wanting to escape the falling dollar and weakening stock market, adding to the 

 8 ARCH and GARCH are acronyms for Auto-Regressive Conditional Heteroskedasticity and Generalized AutoRegressive Conditional Heteroskedasticity. ARCH and GARCH models can be used to forecast and analyze the

volatility of time-series data. They are designed to deal with time-series that exhibit nonconstant variance over time,

a feature sometimes called “volatility clustering.” 9 These points will be expounded in a Baker Institute paper to be released later this fall. 10 Mahmoud El-Gamal and Amy Myers Jaffe, “Energy, Financial Contagion, and the Dollar,” The Global Energy

Market: Comprehensive Strategies to Meet Geopolitical and Financial Risks, James A. Baker III Institute for Public

Policy, May 2008, available at http://www.rice.edu/energy/publications/WorkingPapers/IEEJcontagionElGamalJaffe.pdf.
Who Is In the Oil Futures Market and How Has It Changed?

15

speculative fervor in oil. According to the International Energy Agency, as of July 2008 financial 

investors had about $300 billion invested in such indexes, which track the value of futures 

contracts. The IEA contends that this 2008 level of investment represented a fourfold increase

from index-related investment in January 2006.

Analysis of dollar-oil price data for this period shows a dramatic change in price correlation from 

historical patterns. Figure 6 indicates the daily oil price and the daily value of the dollar against 

the currencies of major U.S. trading partners. For the period from January 2001 through August 

2009, these two measures are very highly correlated, exhibiting a simple correlation of -0.82. 

However, data from a prior period—January 1986 though December 2000—the correlation was 

only -0.08, implying virtually no correlation during that period. The strong -0.82 measurement 

implies that oil prices and the value of the dollar tend to have a negative correlation. In plainer 

terms, depreciation in the dollar will very likely coincide with a rise in the price of oil or vice 

versa. 
Who Is In the Oil Futures Market and How Has It Changed?

16

Figure 6: Oil Price and the Value of the Dollar

Source: St. Louis Federal Reserve Database (FRED) and the Energy Information Administration

While there were short windows of time prior to 2001 where the oil price and value of the dollar 

are more strongly correlated, a dramatic sustained period of high correlation emerged during the 

2000s. Moreover, given the fact that the correlation has increased so dramatically in absolute 

value in the period post-2000, the relationship between the price of oil and the value of the dollar 

seems to have tightened since the beginning of this decade. Again, it is worth noting that this 

coincides with data presented above, and occurs after the enactment of the CFMA. 

The threat to the U.S. economic health and national security is that the dollar risks getting caught 

in a vicious cycle where continually rising oil prices feed the U.S. trade deficit, leading to 

increased U.S. indebtedness and thereby an even weaker dollar, which further drives oil prices 

higher. This pattern is accentuated by petrodollar recycling where a sudden influx of oil revenue 
Who Is In the Oil Futures Market and How Has It Changed?

17

flows to and from the Middle East fuel financial bubbles and investor speculation in commodity 

markets because local Persian Gulf economies cannot easily absorb the sudden influx of dollars. 

Instead, Middle East governments and private businessmen seek the same investment outlets for 

their petrodollars as other global investors, fueling inflated prices in commodity futures markets 

and index funds.

IV. Tools for Preventing Another 2008 in the Oil Market

Mechanisms exist for government intervention in oil markets but the trigger and policy 

framework for their use is not well-defined and poorly and sporadically implemented. For 

example, government-controlled strategic stockpiling systems and oil producer spare capacity 

can both serve an important role in limiting the power of speculators in the global oil market 

during times of crisis or significant oil supply-demand imbalances, but use of these tools has 

been spotty at best.

The experience of 1990-1991 demonstrated the clear benefit of coordinated use of strategic 

stocks and producer spare capacity in contrast to competitive responses in the 1970s and in 2007-

2008. Several years after 1990, the Clinton administration also released oil from the U.S. 

strategic petroleum reserve through the exchange mechanism to cap oil prices at $40 a barrel, by 

signaling to oil markets and OPEC that it would use the SPR to calm oil markets and discourage 

speculative activity during a sudden disruption or severe imbalance of markets. The strategy 

proved similarly successful, discouraging future markets players from holding long positions 

above the $39 a barrel level for fear that U.S. government intervention in the market could cause 

them losses.

In 2007-2008, however, governments around the world, including the United States, engaged in 

building strategic stockpiles, as oil prices rose from $65 per barrel to $125. This policy signaled 

to oil markets participants and OPEC that governments would not use strategic petroleum stocks 

to ease prices under any circumstances except major wartime supply shortfalls. This allowed 

speculators to confidently expand their exposure in oil market futures exchanges without fear of 

repercussions and revenue losses from a surprise release of U.S. or IEA strategic oil stocks. 
Who Is In the Oil Futures Market and How Has It Changed?

18

Ironically, this new policy for strategic stocks coincided with new regulations that allowed 

financial players to obviate position limits for speculators.11 Thus, while the CFTC needs to 

rethink the regulation and market design of organized exchanges and the role of indexed funds in 

price movements, a re-evaluation of the role for government physical intervention in oil markets 

in extreme circumstances is also warranted.12

The surge in oil prices from 2007-2008 set the stage for renewed analysis of the proper 

regulation of U.S. and U.K. commodity futures markets as well as the role of government in 

preventing oil price shocks from harming the overall U.S. economy. An important aspect of this 

policy analysis must be a careful study of the unintended consequences of the CFMA, and of the 

effect of the ballooning share of noncommercial participants in exchange-based and OTC oil 

futures and swaps trading. 

American consumers are perplexed about the continued volatility in fuel prices and seek to 

understand the complex features of oil price formation. Only by delving deeper into the 

interaction between the rising market share of financial players in oil futures commodities and 

changing global oil market fundamentals can sound and effective energy security policy be 

created. Better understanding of the role of financial players in oil futures markets is necessary 

not only to ameliorate the impact of future oil shocks, but also to instruct proper use of 

government strategic oil stockpiles and to create proper and effective regulation of markets. 

 11 Mark Jickling and Lynn J. Cunningham, CRS Report for Congress: Speculation and Energy Prices: Legislative

Responses, June 30, 2008, Congressional Research Service Order Code RL34555. 12 Kenneth Medlock, “Speculation: A Cause or Symptom? An Important Question for Designing a Policy Remedy,”

James A. Baker III Institute for Public Policy, Sept. 17, 2008, available at:

http://www.bakerinstitute.org/opinions/speculation-a-cause-or-symptom-an-important-question-for-designing-apolicy-remedy.