Jul 13, 2009, 10:41 a.m. EST
Speculators leave oil market as regulator mulls crackdown
NEW YORK (MarketWatch) -- Big speculators such as hedge funds and investment banks sharply reduced their buying positions in the recent week, as the futures market regulator said it's considering setting limits in energy speculation.
The drop in speculator positions likely contributed to last week's 10% slump in oil prices -- the biggest weekly loss in six months, analysts said.
Long, or buying, positions held by non-commercial traders, a category the regulator uses to classify big speculators, dropped by 16,382 contracts in the week ended July 7, according to the weekly Commitments of Traders report released by the Commodity Futures Trading Commission late Friday.
That's the biggest drop in four months in oil futures traded on the New York Mercantile Exchange, according to COT historical data. Long positions held by speculators now stand at the lowest level since the week ended May 26.
Meanwhile, speculators increased their selling, or short, positions, resulting in a 60% slump in net long positions. Net long positions held by speculators now stand at 15,357 contracts, the lowest level since May 12. One contract represents 1,000 barrels of oil. See the latest COT report.
The change in speculation positions came as the CFTC said, also on July 7, that it's considering setting limits in the number of positions speculators can take in the energy futures market.
The CFTC will hold a series of hearings starting from later this month, David Gary, a CFTC spokesman, said.
Oil prices tumbled nearly 6% in the two sessions ended July 7 on the Nymex. Futures lost 10.3% last week, the biggest weekly loss since the week ended Jan. 9.
In Monday's trading, oil prices continued to slide, falling below $60 a barrel as demand concerns weighed on prices. The United States Oil Fund, the biggest oil exchange-traded fund, fell 2%. See Futures Movers.
The CFTC's new COT report, which could show further drop in speculation positions in the past few sessions, is scheduled to be released on Friday.
"The drop in oil prices last week has absolutely something to do with the drop in speculation positions," said Tariq Zahir, managing member of futures trading firm Tyche Capital Advisors. "Money is sitting on the sidelines. When you don't know what the new rules are going to be, you hold money."
The regulatory focus, the biggest move by the Obama administration to respond to irregular swings in oil prices, came in the wake of trading patterns that saw oil jump to almost $150 a barrel last year, only to fall back to below $40 this spring before rising again to $70. See full story.
The sharp retrenchment in net noncommercial long positions is "not surprising given the recent buildup taking place just as prices started to erode," said Edward Meir, an analyst at MF Global. "This tells us that there will not be much firepower to drive prices higher, as non-commercials seem to content to watch the [regulatory] action from the sidelines for now."
Some traders, however, said speculators are not to be blamed for oil prices' volatility.
"I know many in the market are tired of speculators getting the blame for things they have nothing to do with," said Phil Flynn, vice president at futures trading and research firm PFG BEST Research.
"I know some funds are holding off investing because they are unsure of what new regulations may come down the pike," he added. "There are some real concerns that due to the political climate we will see the regulators go too far and do damage to the global economy."
The COT non-commercial data don't include positions taken by big institutional investors that buy commodities by tracking a major commodity index. Those investors typically buy commodities by engaging in trades with swap dealers such as J.P Morgan Chase & Co. and Goldman Sachs Group Inc.
These dealers, in turn, hedge their risk by taking a similar position in futures exchanges. The CFTC currently allows swap dealers to take unlimited positions on energy commodities. It also classifies swap dealers as commercial traders, the same as refiners and oil producers.