New Study on Oil Speculation

This study out of Rice University notes that the number of “speculators” have increased from 20% of market participants (7 years ago) to 50% now.  During that period we’ve seen the price of oil spike to $145, and crash back down below $35.  They define “speculator” as an entity that does not intend to take delivery of the actual oil.  But during this period, many pension funds (like CALPERS) have decided to build up exposure to commodities.  Evidence suggests that commodity exposure enhances the return/risk characteristics of a portfolio (see Becker and Finnerty Abstract here), especially during periods of higher inflation.  Clearly, there is little correlation between the price of oil to number of “speculators” since the price both jumped up and down as the number of speculators increased (that said, there may be a direct correlation between the number of speculators and volatility).   So the government is looking at ways to prevent you from generating more return per unit of risk (in your personal investment portfolio) while also preventing you from protecting your assets against inflation.  Beware.    

-Billy Ray

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