Energy Futures Market Trading Versus Physical Commodity Usage: A playground for manipulation or a miscalculation?
AbstractThe relationship between energy futures trading volume and physical commodity usage is evaluated with the aim of demonstrating the correct method of calculation. This relationship has been incorrectly calculated and the misleading results have been offered up as evidence of excessive speculator activity leading to higher and more volatile prices, on the one hand, and to support claims of high levels of market liquidity and transparency, on the other. It is shown that rather than constituting large multiples over physical usage the futures trading activity represents a fraction of usage. These fractions of physical usage represented by futures trading volume cannot support suggestions that futures markets are playgrounds for non-commercial market manipulators. Nevertheless, there is still strong evidence that the energy futures markets provide a valuable basis for price discovery and risk mitigation, since a significant share of physical usage is represented by futures market activity.
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Bibliographic InfoPaper provided by Macquarie University, Department of Economics in its series Research Papers with number 0603.
Length: 12 pages.
Date of creation: May 2006
Date of revision:
Futures contracts; trading volume; consumption; crude oil; natural gas;
Find related papers by JEL classification:
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-21 (All new papers)
- NEP-ENE-2006-07-21 (Energy Economics)
- NEP-FIN-2006-07-21 (Finance)
- NEP-FMK-2006-07-21 (Financial Markets)
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