Index, managed money traders do not harm gas, oil markets: study

News Date: 02/27/2009 Outlet: Platts Gas Daily Contact: Marron, Jessica

26 February 2009

A study commissioned by a group of exchanges, including NYMEX parent CME Group and the IntercontinentalExchange, has concluded that trading activity of index funds and managed money traders has not increased price volatility in natural gas, crude oil and agricultural markets.

The study, completed in October by Informa Economics and released Thursday, concluded that all classes of commodity traders "displayed instances of non-optimal behavior...but none were consistently harmful to the studied markets."

Index traders were among those blamed last year by US lawmakers and consumer advocates for fueling a sharp rise in natural gas and oil futures prices.

The study, which examined US Commodity Futures Trading Commission large-trader data between January 1, 2005, and June 30, 2008, said three major groups of commodity traders--commercials, index funds and money managers--generally traded in consistent patterns.

Further, it said analysis suggested "little evidence" that any one type of trader had a sustained and significant effect on prices in any commodity.

In the case of gas, Informa said money managers--marketers who trade futures to make a profit--often held the largest share of the market and "at least slightly" increased their overall participation between 2005 and mid-2008. Passive index traders also boosted their stake in gas futures markets, but by a slimmer margin, Informa said.

The study did note, though, that natural gas "exhibited routine over-pricing," in which futures contracts often started the month priced higher before trending lower into expiration. It said index traders might be playing a role in this early month over-pricing, as the bulk of their activity tends to take place 25 to 50 days ahead of contract expiration.

The study also said that over the last 20 days of a contract's life, money managers "surprisingly" had a very large presence in the gas market, but noted that both the commercial and noncommercial sides "exerted similar price pressure."

In the case of crude oil, the study found that the contract typically began the month at low price, then rose as the contract approached expiration. But Informa noted that it was not suggesting crude oil prices were artificially inflated at expiration. "If anything, it suggests that there is a downward bias in crude oil futures prices," the study said.

Unlike in natural gas, index traders in crude oil "have some positive correlation with liquidity." Between 2005 and mid-2008, the crude oil market, Informa noted, showed the most pronounced increase in liquidity of the all commodities examined.

Although a larger presence of index traders correlated with rising volatility in agricultural markets, the Informa study said the reverse was true for natural gas and crude oil.

But, the study added, "there is nothing in this analysis that points to the conclusion that index traders and/or money managers 'cause' higher volatility. Instead, fundamental conditions (tight supplies, strong demand expectations) might have attracted certain trader types such as money managers who require volatility in order to profit."

In addition to gas and crude oil, the Informa economists also studied the impact of commercial and noncommercial trading in corn, soybeans, cotton and wheat.

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