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“Even if we see significant short-run gains in global oil production capabilities, if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil price spike of 2007-08 will be back to haunt us again.”
- Dr. James D. Hamilton, Professor, University of California San Diego, Testimony before the U.S. Congress Joint Economic Committee (05.20.09)

“If speculation by long-only index funds did impact commodity futures prices, it is not evident in the empirical evidence available to date. Economic fundamentals, as usual, provide a better explanation for the movements in commodity prices.”
- Dr. Scott H. Irwin, University of Illinois (02.01.09)

“We take the view that all financial markets benefit from having a broad range of participants—providing the overall market remains fair and orderly. In particular, the involvement of a wide range of participants helps support the price formation process and deepens liquidity, which benefits all participants.”
- Memorandum from the Financial Services Authority (FSA) (07.2008)

“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.”
- Interagency Task Force, Interim Report on Crude Oil

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Welcome

Energy markets — and crude oil in particular — are global markets.

They are shaped by a multitude of factors, including geopolitics; international economic policy and growth; inflation expectations and currency valuations; energy policy; OPEC and non-OPEC crude oil production; storage and pipeline availability; and local demand and refinery capacity for petroleum products. In recent years, the growth in demand of non-OECD countries has driven supply and demand to a historically narrow margin. Today, the price of energy reflects the market’s view of all of these dynamic elements.

Commodities markets rely on a mix of commercial participants and liquidity providers — sometimes referred to as financial participants or speculators — for efficient price discovery. Markets cannot function, and hedging cannot take place, without the active participation of both groups. Commercial entities seeking to lay off risk benefit from liquid, transparent markets. Financial participants willing to take the other side of these hedges and bear the risk of price fluctuations are often the source of this much-needed liquidity. As a result, it is the presence of both groups that allows hedging and risk management to take place. Without them, businesses may be forced to raise prices to compensate for input or production prices they are unable to effectively manage.

It is tempting to blame the messenger, particularly when the message is not welcome. Because it is easy to confuse correlation and causation, pointing to “speculation” is a convenient, time-worn approach — although its alleged role has very little basis in fact. According to numerous agency reports, speculation has not been found to be the fundamental driver of prices. To continue to blame speculation without evidence may result in overlooking important signals the markets are trying to send.

No single exchange, regulator or group of market participants determines global energy market prices. Attempts to limit market participation are likely to drive markets beyond the reach of U.S. regulators, undermining public policy objectives of market transparency and economic stability.

This website offers information and commentary from a wide range of sources, and provides an overview of the role of commercial producers and liquidity providers in the global energy markets.