May 2, 2012 Resources for the Future “First Wednesday” Seminar
Financial Trading in Energy
Markets
Jeffrey H. Harris
Dean’s Professor of Finance
Syracuse U
jhharr03@syr.edu
Recent Price Changes/Volatility

Worldwide Markets—Cooperation
◦ IOSCO, OECD, IEA, etc.

Financial/Product Market Overlap
◦ SEC, EIA, FERC, Fed, etc.
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Sources
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Uncertainty(Financial Crisis)/Risk Management?
Animal Spirits?
Traders?
Weak Dollar?
Public (mis)Perceptions
2
Data Available

Large Trader Data—at CFTC.gov weekly
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Producer/Merchant
Swap Dealers*
Hedge Funds*
Others
“This Month in Futures Markets” Report
 Index Investment Reports—monthly

◦ Since December 2007
*speculators
Research Results

Swap Dealers bring information from
◦ OTC positions
◦ Index investors “Massive Passives” and prices
 Across commodities: No relation between price
changes and position changes
 Over time: Inverse relation

Hedge funds
◦ Serve to reduce volatility
◦ Follow price changes, do not lead
◦ Herding is counter-cyclical:
 Buy herding when prices fall
 Sell herding when prices rise
NYMEX WTI Crude Oil Commodity Index Values
Quarterly Equivalent Contracts (000s) vs. Daily Price during 2008
170
440
150
Overweight,
so sell
400
110
380
90
360
Price
Rises
70
340
12/15
11/24
11/3
10/13
9/22
9/1
8/11
7/21
6/30
6/9
5/19
4/28
4/7
3/17
2/25
300
2/4
30
1/14
320
12/24
50
12/3
Price per Barrel ($)
130
420
ETFs--An example
Index investment grows 113%
• Natural Gas down 46%
• ETF down 87%