What can we say about the T indices for the petroleum complex? For the Nymex heating-oil and gasoline futures markets, the T indices are within range of what had not been considered excessive for the agricultural futures markets.

For the very brief time period that we have ICE Futures Europe data, the conclusion for the ICE WTI contract is the same as that for the Nymex heating-oil and gasoline contracts.

As long as one includes options positions, the T indices for the Nymex oil futures markets are not excessive, again, provided that it is acceptable to use the historical agricultural futures markets as a guide to the adequacy (or excess) of speculation. It is also noteworthy that from the summer of 2007 to the summer of 2008 the Nymex WTI oil futures market did become more speculative (relative to hedging), even if the data for futures and options combined showed that the peak T index would not be regarded as excessive using our historical benchmarks.

Now, to be circumspect in our conclusions, we must note that if we exclude the option positions in the Nymex oil data, the futures-only data would potentially indicate excessive speculation in the U.S. oil futures markets.

We must clearly be careful about how strongly we word our conclusions. Within the closed system of the US oil futures and options markets, we find no evidence of excessive speculation, at least not when we use traditional metrics and when we include options positions with outright futures positions.

Also, if excessive speculation can be defined differently than as in our paper, then obviously we cannot say for certain that there has not been excessive speculation in the oil derivatives markets. Nor are our conclusions necessarily incontrovertible, if it is inappropriate to use the historical balance of agricultural speculation versus hedging activity to categorize this balance in the oil markets.

In addition, we have not examined whether futures-spreading activity over the past three years could have constituted excessive speculation. Finally, we cannot say there has not been excessive speculation in the oil markets through other venues.

But we can say that, based on traditional speculative metrics, the balance of outright speculators in the U.S. oil futures and options markets was not excessive relative to hedging activity in those same markets from June 13, 2006, to October 20, 2009.

--Hillary Till

About the Author: Hilary Till is a research associate for EDHEC-Risk Institute (Nice, France), a principal of Chicago-based, proprietary trading firm Premia Capital Management LLC and co-editor of the best-selling book Intelligent Commodity Investing (RiskBooks.com/IntelligentCommodity). Before co-founding Premia Capital, Till was the chief of derivatives strategies at Putnam Investments and a quantitative analyst at Harvard Management Co. She has a B.A. with General Honors in Statistics from the University of Chicago and an M.Sc. in Statistics from the London School of Economics, where she studied under a private fellowship administered by the Fulbright Commission.

Click for Till’s full report: Has There Been Excessive Speculation in the US Oil Futures Markets? What Can We (Carefully) Conclude from New CFTC Data?