1. THE ROLES OF HEDGERS AND SPECULATORS IN THE NATURAL GAS AND CRUDE OIL MARKETS Prof. Ronald D. Ripple Director, CREME Curtin University 30 th USAEE/IAEE North American Conference Washington, D.C 11 October 2011

2. Motivation Market and data What is excessive trading Open interest versus trading volume Index investment data Shares of trader categories Granger causality Conclusions

3. Crude oil futures market - NYMEX Crude oil futures prices (NYMEX, CRB, EIA) Crude oil futures trading volumes (NYMEX, CRB) Crude oil futures open interest (NYMEX, CFTC) Time periods – Prices: January 2000 – March 2011 – Trading volume: January 2000 – March 2011 – Open interest: NYMEX : January 2000 – March 2011 CFTC-Legacy: January 2000 – September 2011 CFTC-Disaggregated: June 2008 – September 2011 Index Investment Data: Dec 2007 – July 2011 (periodic)

4. CFTC-Legacy: – Commercial: long and short – Non-commercial: long, short, and spread – Non-reporting: long and short CFTC-Disaggregated: – Producers-Merchants: long and short – Swap dealers: long, short, and spread – Managed money: long, short, and spread – Other reporters: long, short, and spread – Non-reporters: long and short

9. Index Investment Data In US dollars and futures equivalent contracts Includes index funds, swap dealers, hedge funds, pension funds, and mutual funds. Source: CFTC Total notional value is $418.6 billion.

15. Granger causality tests Following the approach employed by Stoll and Whaley (2009), I first estimate the relations between the change in futures prices and its own lagged values. Then I employ a variable-addition test of the lagged values of changes in net open interest positions; one trader category at a time. [Microfit econometric software is employed.] The estimation is then reversed whereby the change in net open interest positions is estimated against its own lagged values, and then I perform the variable-addition test of lagged values for changes in the futures price. I also test for Granger causality between categories of traders (commercial versus non- commercial); testing for the influence of lagged values in both directions. [None of the variables exhibit unit roots.] For example: (SP is settlement price; NOI is net open interest; i designates commercial or non-commercial) (1) (2)

16. Grange causality test results Crude oil The change in non-commercial net OI is Granger caused by the change in commercial net OI, but it is not Granger caused by the change in price. The change in commercial net OI is caused by the change in price, but not by the change in non-commercial net OI. The change in crude oil futures settlement price is not Granger caused by changes in either commercial or non-commercial net OI. Natural gas The change in non-commercial net OI is Granger caused by the change in commercial net OI, but it is not Granger caused by the change in price. The change in commercial net OI is Granger caused by the change in non- commercial net OI (but only at the 7% level), but not by the change in price. The change in natural gas settlement price is not Granger caused by changes in either commercial or non-commercial net OI.

17. Conclusions No evidence of excessive trading No evidence of changes in net futures positions influencing futures price changes Some evidence that non-commercial trader activity is influenced by commercial trader activity, but not the reverse (but perhaps weakly for natural gas) H.R. Stoll and R.E. Whaley (2009) “Commodity index investing and commodity futures prices,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478195 or http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478195 http://openmarkets.cmegroup.com/wp-content/uploads/2010/02/Stoll-Whaley- Report.pdf

18. THE ROLES OF HEDGERS AND SPECULATORS IN THE NATURAL GAS AND CRUDE OIL MARKETS Thank you! Questions and/or comments? Prof. Ronald D. Ripple Curtin University