TORONTO: Brexit has hit oil markets. Though to be fair, even before the decision, oil markets were in a loop. Mid-June oil prices had already hit a one-month low. What made the markets slip — even before Brexit? It was not mere fundamentals. Speculation too played a significant role.

Futures market traders and large oil speculators reduced their overall bullish bets in WTI oil futures the week before, for a fourth consecutive week, Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) said.

The non-commercial contracts of crude oil futures, traded by large speculators, traders and hedge funds, totalled a net position of +312,585 contracts in the data reported for June 14th. This was a change of -12,597 contracts from the previous week’s total of +325,182 net contracts for the data reported through June 7th.

For the week, the standing non-commercial long positions in oil futures fell by -2,156 contracts and combined with the short positions (selling) that rose by +10,441 contracts to total the overall weekly net change of -12,597 contracts.

Hedge funds and other money managers cut their combined net long position in the three main Brent and WTI futures and options contracts from a near-record 633 million barrels to 570m.

The combined net long position in WTI on Intercontinental Exchange and the New York Mercantile Exchange was cut by 46m barrels, 19 per cent, to 198m barrels.

The net long position in Brent on the Intercontinental Exchange was cut by 17m barrels, 4pc, to 372m.

Hedge funds’ bullish long positions were cut by 34m barrels in the week to June 14 but short positions increased by 30m barrels.

Aggressive shorting of oil prices has been most noticeable in the NYMEX WTI contract, where the number of hedge fund short positions increased by 19m barrels in the week to June 14.

Over the 14-day period, hedge fund short positions in NYMEX WTI rose by a total of 43m barrels, more than 80pc, from the previous low of just 53m barrels.

Consequent to all this, crude prices slumped.

This is not new. This issue of speculation has been under hammer for some time now. Most now do concede that speculation does play a role and impacts markets. The recent slump is just one candid example of that. Yet only a few years back, most especially in OECD did not agree. Credit for this change in thinking and attitude towards speculation goes largely to the former Saudi oil minister Ali Al-Naimi.

One could recall, way back in summer 2008, while the crude prices were touching new heights, day after day, all the fingers were pointing to Saudi Arabia within the Opec — as the main culprit. In those tumultuous days, Mr Naimi held his fort — underlining that speculation and not fundamentals were responsible for the oil market woes.

There was no dearth of oil — he continued hammering despite insistence from the likes of Secretary Samuel Bodman and Gordon Brown that supplies were insufficient — unable to satiate the galloping global crude demand. And that the producer needed to open taps to cool the markets.

Pointing to the role of speculation, minister Naimi then argued: ‘Weak equity and bond markets, besides others, have encouraged investors to move their capital into commodities like oil. Consider that the bond and equity markets in the US alone are valued at roughly 50 trillion dollars, and that if money managers decided to reallocate a nominal one-half-of-one per cent of those assets into the oil commodity space, the resulting $250 billion influx of funds would equal the value of the entire NYMEX WTI markets.’ The minister definitely had a point. After all, oil is the world’s largest traded commodity.

In a write-up way back in 2008, William Engdahl, the author of “A Century of War: Anglo-American Oil Politics and the New World Order,” also shed light on the role of speculation in the energy markets. Not shy of challenging the established theories, Engdahl claimed then that as much as 60pc of today’s crude oil price has been pure speculation, driven by large trader banks and hedge funds.

Speculators have been fiddling with oil markets for long, swaying it one way or the other. And fundamentals have taken a back stage in this ongoing drama. Capitalism plays tricks. The recent oil price slump only augments the theory.

Published in Dawn, June 26th, 2016