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There is no clear connection between oil futures speculation and oil price. I wrote that in an earlier version of this column. While I believe that supply and demand are the main causes of high oil price, oil futures speculation may play some role. Let me explain.
Oil producers and consumers buy and sell oil futures contracts to guarantee a future price as a hedge against price change. The distinction between speculative (Non-Commercial) and legitimate (Commercial) traders by the US Commodity Futures Trading Commission (CFTC), however, seems somewhat arbitrary, or at least imprecise. A futures position is considered commercial by the CFTC if the trader intends to take physical delivery of oil. In contrast, a speculator uses futures positions solely with the intent to profit from change in the value of oil. How does the CFTC know if a trader buys futures contracts to manage price risk or is in it only for the money?
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