Minor point, but I think that the HL plot that you showed is for Total US (assuming crude + condensate).

Shouldn't the currency be based on a basket of non-renewable resources which include energy, minerals, fresh water, etc.?

Isn't the attempt to wring the speculators out of the system completely misguided. It seems to me that a critical data set was established between 2004 and July 2008, which was that the price of crude tripled and production remained essentially flat. Whether the rise in the price of crude was due in part to the role of speculators and/or market participants getting caught in short squeezes, is, on the whole, immaterial. What is important is that the world does not appear to be able to reliably produce much more than 85mm barrels/day of crude and other energy liquids. Rather than waste everyone's time trying to reset the rules for the energy futures market, it would be far more worthwhile to take dramatic measures to decrease the U.S.'s and rest of the world's use of fossil fuels in transportation. anyway, just my thoughts.

Wait a minute! Isn't the energy crisis solved? I mean kitegen has an EROEI of 375! Thorium has the potential to provide infinite energy and there is space based solar power? :)
Scarcity is so old school! We live in the Economists world of abundance and plenty, can't wait for the singularity to occur!

I still don't totally get it how speculators can affect oil prices. The speculators are playing with future markets. Real oil is priced in spot markets. Unless speculators have a big tank, I don't understand how they can buy oil from spot market and make the price rise.

Of course they can cause future markets to rise and create contango. Then someone can make money by buying oil from spot markets and storing it as has happened recently. But was this case what caused the spike in last year? Or was it real demand from refineries?

Nate,
global notional derivatives are in excess of 1,000 trillion, while global GDP is only $55 trillion
Is this relevant? By the nature of derivatives they are bets taken against each other, they are not physical products, when the 1000 trillion are added together, won't they become close to zero?

I agree with many of your points - however, I wouldn't necessarily say that funds like Amaranth and Ospraie are examples of extreme leverage. They flamed out spectacularly, but they weren't close to losing more money than they had cash on hand. I think that those are an example that the commodities futures market works really well compared to say, fixed income and equity markets.

For the size of their positions, the commodities markets handled those blowups extremely smoothly. We have actually had many dramatic blowups of both physical players and financial in the past few years, and none of them turned out to be systemic risk. Take 'speculators' out of the equation, and when a physical player blows up, it's going to be ugly, with nobody to provide liquidity. This is a problem with what lawmakers are trying to do.

It's a little specious reasoning to compare the amount of oil left with derivatives contracts. One is consumed and gone forever and one is not. Making a bet on something doesn't use up a resource.

Great article Nate. Some amazing analysis here. I particularly like articles like this that go beyond just analyzing oil supply or projected supply, instead linking energy in its relationship to the economy. You nailed it in so many ways.

"As we are mired in a deepening recession, the roots of which lie in the generation long replacement of tangible things with paper and digits, the logical human reaction to oil moving back from $40 to $70 is to blame someone, in order that it retreat some and not act as economic headwind."

"Energy, particularly liquid fuel, is the hemoglobin of modern civilization."

"Like M. King Hubbert, I am in favor of an energy based currency and no futures trading at all other than for producers and those taking delivery. But these ideas are so many steps beyond 'regulating oil futures in order to keep prices low' I expect I am wasting my breath."

It probably is a waste of breath because the same human behavior that ridiculed and ignored Hubbert, is still with us.

This is a graph shown is a WSJ article called Oil speculators under fire, comparing long oil positions and prices of oil. I am having a hard time seeing a strong correlation. For a while it looked like prices went up as long positions went up, but it doesn't look that way recently.

Great article and analysis as usual.

I did a quick google on the 'value of money' and came across some interesting websites with calculators and database series on national inflation rates, purchasing power (erosion), GDP, etc., but nowhere -and i mean nowhere- in any of the so-called 'economic websites' that I followed did they make the link between currency (or credit) and our natural capital.

http://projects.exeter.ac.uk/RDavies/arian/current/howmuch.html

That's why I keep coming back to this sight for information about our economy. It's not just about the credit or currency folks! It's about how it interacts and relies on energy.

Kudos to Hubbert and Nate!

I have been a TOD reader for one year and I am a young professional that has worked in the oil and gas industry since 2003. I am glad that there is an active online community providing critical analysis on the worlds current energy issues.

I am in the camp that global liquids production peaked sometime back in 2005/06 and we are now witnessing the volatility in price that follows a widely used resource that is in terminal decline and has reached a supply/demand imbalance.

This recent call from various governments around the world to put the lid on "speculators" is just the dog and pony show that politicians will conduct to try and find someone to blame for the recent price volatility. Considering in the oil and gas industry uses futures markets and hedging quite a bit to mitigate market risk there is definitely a lot of concern about what may happen here but most don't think real regulation is actually possible.

Governments appear to be starting to worry now, peak oil is becoming reality and a more frequent headline in the news. Many economies and businesses cannot and will not be able to operate in an environment where such a critical resource can fluctuate so violently in price. This is going to cause further contractions and many more bankruptcies beyond some of the recent automotive, banking and airline industries which I consider to be the "canary in the coal mine" businesses for peak oil. I also think it will pose significant problems into the oil and gas industries ability to survive in its current form much less increase production.

The fact that cap and trade is likely to pass in some form and that the current administration is providing little to no incentive/leadership in switching the U.S. to natural gas as a transport fuel and as the most realistic and economical bridge fuel to re-newables is a complete travesty."New Deal" type government programs and increasing oil scarcity are now only going to exacerbate our economic woes.

We are entering perilous times, an energy induced recession I expect to last well into the next decade and a total upheaval of the American way of life as we know it.

Nate -- the real problem is that no one owns the soil, water, or air.

No human owns any part of our habitat.

We have hallucinated capitalism as we have run riot over the planet.

Dollars, digits, and digital data related to currency are all part of the delirium tremens -- the trembling madness -- of a species drunk on the liquor of easy access to energy combined with a bizarre mash-up of superstition, primitive rage and fear, and very clever (and thus very dangerous) technology.

The ideas and numbers presented by economists show us nothing of reality in the way that economists intend.

They do reflect the reality of a kind of manic madness fed by increasing amounts of the liquor of abundant material resources which for awhile hid the madness completely.

In order to keep the hallucination going we need ever increasing amounts of this liquor.

The only way to keep increasing the amounts of the liquor we crave is to kill off other people and take their share.

We do this on a daily basis and in a very organized and intentional way. We call it war and extend our superstitious rampage as far as we can.

I appreciate your article, but do not see a way to back ourselves out of our predicament.

If we all make the best efforts we can, then some things might just work.

Meanwhile the only thing that matters is love, so all is not in vain.

Discussion of economics is fine, but we ought to start with a clear rejection of the dehumanizing nightmare inflicted on us by economists thus far.

Veblen made some sense, didn't he? I've not read much of his stuff, and it has been years. Jay Hanson just mentioned him over on "peak oil killer ape" as one who challenged the prevailing economic model of his time.

Here I go again on comparing things that are different. In the graphs that Nate uses up top, the first shows the decline in remaining recoverable crude vs. rising nominal treasury debt. This looks alarming of course.

And the next graph shows the declining value of the dollar. Can't have it both ways! If the dollar's real value has declined as shown in the second graph, the first graph which is the real recoverable crude must be compared to the real value of U.S. Treasury Debt adjusted for the declining value of the dollar shown in the second graph.

If the dollar has declined in real value to 1/10 of its former real value, then the debt's real value has declined in proportion. Therefore the real value of the Treasury Debt is about 1.2 trillion dollars not the 12 trillion shown. Real must be compared with real and not nominal as is done in the first graph since the remaining recoverable crude is real.

This is a serious logic flaw. Real must be compared with real. The value of the Treasury Debt shown in the first graph should reflect the decline in the value of the dollar shown in the second graph. Then the situation would not look so alarming. Inflation is a friend borrowers.

Excellent post, Nate.

Firstly, I recently found a very interesting argument

The Commodity Conundrum

from one Shalom Hamou which goes totally against conventional wisdom, but which I find quite convincing. (My bold)

Abstract:

This article is an updated version of an article that was published in Seeking Alpha. I have updated and clarified certain definitions. The relevance of that article in today's Market justify this updated publication.

The commodities we are concerned with here are those with potentially very low storage costs. Minerals, when kept in the ground, have a storage cost next to zero.

I observed a strong link between the evolution of the market price of minerals and the shape of the yield curve.

The slope of the yield curve indicates the fair valuation or not of the price of short-term assets compared to long-term assets.

I am going to show that the shape of the yield curve is a first order parameter of the evolution of the price of minerals.

When the yield curve is inverted, because of profit maximization, Miners & Drillers prefer hoarding a higher proportion of their minerals in the ground (their preferred short-term assets) rather than extracting them and investing the proceeds in long-term instruments. Hence, the marginal cost of extraction of minerals becomes irrelevant to their market price as miners stop maximizing their output under the constraint: Market Price - Their Marginal Cost of Extraction.

What underlies his yield curve argument - and also the proposals I have been working on for an "Energy Standard" and International Clearing Union etc - is the relationship between Money, Value (money's worth), and credit.

Secondly, I believe that the CFTC are barking up the wrong tree.

For a deliverable contract, the futures market converges on the spot market, and not vice versa, and while position limits are useful coming in to the spot month, they are not really necessary even there because any clearing member who goes in to a delivery month without ensuring that either he, or his clients, are in a position to make or take delivery in accordance with exchange rules is in deep shit.

In my view, and this was the tenor of my evidence to the UK Parliament Treasury select committee last year, the big problem lies in the (rightly named) Brent complex ("Brent" is of course now BFOE - Brent, Forties, Oseberg, Ekofisk).

The hugely traded ICE BFOE contract is of course cash settled and therefore can have no direct influence on the physical or "spot" market price any more than a bet between me and Nate.

It is settled against a price calculated against trading in respect of the BFOE 600,000 barrel forward contract, but even this price is not that against which most of the global oil price is calculated. It is the Platts assessment of "dated" BFOE contracts to which we must look for that, and the relationship between the ICE futures price, the forward price, and the dated price is what makes the Brent complex...well, complex. It is also a licence to print money for intermediaries at the expense of end user producers and sellers.

Moreover, although it may not be easy for US politicians to accept, WTI is, through the existence of massive arbitrage trading between BFOE and WTI, almost entirely irrelevant as a pricing benchmark other than in the US. The ICE BFOE tail wags the NYMEX WTI dog, and a great part of NYMEX trading continues to be locals feasting on order flow.

I have long believed that a good starting point - and indeed the basis of a new global energy architecture is a global trade repository

Trade Body should be in control of oil sales

Such a registry, through an exclusive user group ("International Energy Trade Association"), gives both a mechanism for transparency, and also a tool for enforcing and maintaining agreed market standards - ie suspension or termination of membership of the user group, and hence of the right to register transactions.

I digress.

For as long as we have a financial system dominated by intermediaries intent on maximising profits - and moreover a system in which these profits are accounted not in Units of value but in Units consisting of claims over value asserted "ex nihilo" by credit institutions - then we are stuck on the current treadmill.

I believe that the key is to create a partnership-based framework within which end users transact directly, and where intermediaries transition to service providers. In fact we are already seeing this trend writ large in the way that producer NOCs are taking back ownership on reserves from NICs, and re-engaging with them as service providers.

As I outlined here, my proposal is essentially for the creation of simple but radical new asset classes, which are to all intents and purposes new currencies. In particular, these would be units redeemable in gas, electricity, and other carbon-based fuels but priced against a Unit of Measure or "Value Standard" consisting of a fixed amount of energy.

It is only by bringing to bear a full global market price of energy to bear on those nations profligate in its use that we will see a serious reduction, and through monetisation, we may compensate the citizens of these nations with Units redeemable in energy which have a global value in exchange.

Within a partnership framework it will be possible to address resource use, apply a carbon levy, and much else on the basis of sharing gain and pain.

My take on what has been going on these last 15 years in the oil market is that we have seen three periods:

Firstly, from the mid 90's to maybe 2002/3 we saw the dominance of investment banks and oil trading intermediaries who routinely and systemically created artificial levels of price volatility. They profited from this, and from information asymmetry at the expense of end user producers and consumers who were using the market for its intended primary purpose - ie hedging.

Secondly, from 2002/3 to last year was the era of the hedge funds, who began to lead market volatility, but the investment banks morphed seamlessly into making money from prime brokerage, and privileged knowledge of order flow and positions.

Finally, and more recently, we have seen the flow of money into "safer" ETFs and the likes of the GCSI.

Pillaging these big fund positions has been going on for years. I blew the whistle on it 9 years ago and lost everything I had - livelihood, home, family - as a result, but it has long since been accepted that such conduct is a fact of market life.

Goldman Sachs magic commodities box

Hell, if you make the rules, you can't break them can you?

Finally, and apologies for such a long post, I think that what is happening in the market is that funds such as GCSI are essentially being used to prop up the market price through long term manipulation of the BFOE complex.

I am reminded of the way in which the International Tin Council kept the tin price artificially high for years - until production ramped up, they ran out of money, and the price collapsed overnight in 1985 in the "Tin Crisis".

I am also reminded - and this is probably a closer analogy to current shenanigans - of Hamanaka's long term manipulation of the copper market which went on for 10 years, and for five years was undetected.

Of course, the producers who are coining in hundreds of billions aren't going to complain about a few billion to middlemen, and the consumers don't know that they are losing.

This brilliant article by Mike Riess is a must read in the context of

Modern Market manipulation

What is needed IMHO is a new global energy settlement at a Bretton Woods II where a new architecture, pricing mechanism, reserve currency denominated in energy and investment distribution allocation is made in respect of energy.

Thanks for bearing with me!

Hello Nate,

Regarding futures, options and [S]ulfur: recall my earlier post on the Twentyfold S-price increase and the consequent ripple effects through I-NPK and industrial goods.

http://www.thefreelibrary.com/Multiple+measures+to+cope+with+rising+sulfur+price.(Inorganics)-a0177721247
-------------------------
Mar 26, 2008

...At a time of oversupply in the global sulfur market, it is strange that the drastic price rise has happened. The major reasons are as follows: (a) A long-lasting strike staged by railway workers in Canada, the major sulfur producing country in the world, has blocked transportation and limited the supply of sulfur in some regions; (b) The output of sulfur in the Middle East has remained unchanged in recent years; (c) The ship sinking accident in Russia has led to the disrupted maritime shipping of sulfur.

.... sector is seriously affected

Sulfur is mainly used to produce sulfuric acid. More than 72% of sulfuric acid is used to produce chemical fertilizers, mainly including phosphate fertilizers, mono-ammonium phosphate, di-ammonium phosphate and potassium sulfate.
-------------------------

http://seekingalpha.com/article/105682-intrepid-potash-inc-q3-2008-earni...
----------------------------------
Finally, we want to remind everyone that the potash supply and disruptions are not uncommon as evidenced by the Russian mine flood in 2006, a 2007 Canadian railroad strike, the threat of loss to rail service in Russia in 2007, and a labor strike in Canada in 2008.
-------------------------------

http://www.newratings.com/en/main/company_headline.m?&id=1531244
----------------------
Canadian Pacific Railway track workers declare strike 05/14/07

..The company’s spokesman Mark Seland said a strike would not affect operations and traffic on the railway’s main lines but operations and traffic on branch-lines are likely to be impacted.
----------------------

http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSN1...
-----------------
CP Rail Canadian train crews ratify new contract Wed Feb 13, 2008
----------------

After this RR-strike started, recall that some companies called force majeure as shortages arose. Combined with rising oil prices back then, one could almost say this transportation bottleneck caused a I-NPK and industry bottleneck, which then caused a food bottleneck, which then led to food shortages and rioting. Then, the price of crude crashed, followed by sulfur and other major commodities. As Asimov's List clearly shows: You don't want a "Bottleneck in Nature".

Since there was no futures market for S: perhaps a lot of the companies that needed S bought oil futures to try and hedge against the remarkable price-rise in S? Wouldn't this only help make oil go to $147?

Since I am not an expert, what happens when this S-futures market starts next week?

http://news.prnewswire.com/ViewContent.aspx?ACCT=109&STORY=/www/story/06...
----------------------------
CME Group Announces the Launch of New Sulfur Dioxide Futures and Options Contracts
-----------------------------
Since Recovered-S is from hydrogen sulfide, but sulfur dioxide is generated by burning sulfur and sulfur compounds-->doesn't this new S-market encourage the oil & natgas companies to hoard their sulfur and get a much higher price/ton? Don't forget that these companies already have a big investment in Spent Acid Regeneration [SAR] equipment.

Or am I totally confused by the nexus of market futures meeting complex sulfur chemistry meeting supply & demand? Thxs for any reply.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

One thing that strikes me is with the price of natural gas so low and so volatile, it seems like that would need as much or more investigation as oil. But that doesn't seem to be what is happening, unless I am missing something.

I have suggested something analogous to price supports for both. I don't think that is going to happen either.

It is also possible to speculate on horses, cards, lottery numbers, and the roll of dice or roulette wheels, and maybe even make money on these. It is also possible - or more accurately, probable - that one can lose money on these.

I fail to see very much, if any, difference between these activities and the activities that go on in the trading pits. The odds seem to be just as highly stacked against the ordinary person.

A free people should be free to engage in any of these activities. I see no good reason why any of them should be held up for approbation and encouraged, though. Speculation in all its forms has traditionally been frowned upon, and for good reason. The whole notion of getting something for nothing is highly corrosive of more solid virtues such as honest work, thrift, self-discipline, and prudence. It is these, and not speculation, upon which a great people and a great nation are built and maintained.

I am in favor of an energy based currency

I like the concept, but can this actually be accomplished? Take the US, for example; with tremendous debt and limited oil resources, can the US even cover its debts, much less provide for liquidity for payrolls, purchase orders, etc? Wouldn't the transition be untenably wrenching?

"Let's return to a central theme: that finite resources are being quantified by infinite money. "

There may very well be other ways to do it, but as was discussed here http://www.theoildrum.com/node/5485 the energy available from the sun is effectively infinite. The only problem is to collect it at a high enough EROEI.

Even with conventional (throw away) rockets space based solar energy pays back the energy needed to lift it to GEO in no more than 100 days. The problem is getting the cost down and there is at least one way, probably many ways, to do this.

Keith Henson

As distorting as participant behavior may be, the futures market is the only system currently in place where one can express an opinion beyond the cult of the present. Beyond, as you like to say, our preference for a steep discount rate. And so there is a dark side to control and limitation of behavior in the futures market--it is a control of information, a limitation on a viewpoint. Unfortuneatly I see a number of actors who would benefit from having this information removed from the futures market. In particular, policy makers of all kinds and legislators. Agreed, generally, there are no good answers to either the problem of the present vs future tension, or, the age old quest for a stable currency. I would almost rather see a control of fractional reserve banking and debt creation first. But notice that no one in government calls for that, do they.

I can imagine a time when the US Treasury Bond market gets out of control, and the call is heard to control speculation in the long end of that futures curve as well.

No easy answers.

G

I read your interview above and wanted to see it on the TV. I missed the first 5 minutes of the 6:30 pm show so I forced myself to stay awake for the 11:30 pm repeat. As usual, mainstream media left out all of the really good stuff.

Thanks for this posting. But the 2nd graph (Historical real value of US dollar (American Institute for Economic Research) needs some explanation.
What is the "real value" related to? Is it compared to one leaf of bread, gold, UK pound, a mixed bag of goods or whatever? This is important to know as for example a hand made mechanical watch may have got much more expensive whereas a computer got much cheaper (even more if so called hedonic improvements are considered).

Does it make sense impose trading restriction to just a subset of the markets. How many more gold contracts are sold than the writers actually hold in their vaults? Is gold a necessity of life? Can the Goldman's not just use the cash generated from this paper market to manipulate their profits in other ways. I think so. Uncle Sam will take care of nephew Goldman, don't you worry. It's just less and less a free market everyday. More deception, but no less screwing of the honest man on the street.

The only thing I can be sure of regarding the dealings of the oil traders is that I would be broke in a week if I got involved.

But if there is away to let a little sunshine,I'm reasonably sure it would destroy a few slimy creepy crawlies that can only survive in the dark.

Wiil trading limits help in this respect?Will the rest of us-as opposed to the traders themselves,know any more ?

I admit that I scanned thru the comments quickly, so someone may have made this point already, but, with regard to derivatives it is important to define terms. Many in the press and a number of traders, include in the term contracts that are really insurance policies. For example the infamous credit default swaps that AIG wrote that were in fact insurance policies on which, it turns out, they collected a premium that was far to small, thus an asymmetric loser/winner outcome. A true swap and most of the derivatives (not all) related to oil are a sum zero game, the winner getting virtually what the loser loses.

With regard to Goldman, Morgan and others, the best way to look at their flow of derivatives (in oil, I don't know much about the rest of their books) is to think of a bookie. Mostly they make their money on the "vig", or the bid/ask if you like, so the larger their deal flow, the more they make. Everyone forgets that the line on a football game has not one thing to do with the bookie's forecast of the outcome, it is just the number at which they get equal $ volume on each team as that is their goal, insuring a risk free 10%. Swaps get priced in fundamentally the same way.

What CFTC changed back when was to allow Goldman et al to have a virtually unlimited position (making them "commercials"), as a hedge against OTC derivatives and, equally important to the movement of oil prices, against index funds. If speculators had any thing to do with driving prices higher, it seems to me most likely that it is due to the Index funds whereby many categories of investors went (almost) permanently long. As these funds grew, you could see their bids come into the ring (before electronic trading took over), the cardinal sin for the fellow executing their trades was failing to get filled, not price. Their orders were "just f...ing buy it"!

At the end of the day, I have yet to see any advocate of the "evil speculator driving up futures prices" story, give a satisfactory answer to the fact that there is a seller for every buyer, a short for every long.

Coal is traded through a NYMEX Clearport in connection with the CME. See here for description: http://www.nymex.com/coa_fut_descri.aspx

A few observations:

Non-commercial traders were allowed into the oil futures market under the pretext that they would engage in legitimate hedges. What actually happened is that they acted as funnels for outside money which couldn't directly access the market. These transactions were handled through what were essentially credit swaps. As you might expect, all this extra money in the market drove up prices. It could do so especially because of the built in leverage in the market where margins were only on the order of 5-7%. The result was an explosion in paper barrels so that there might be a 100 paper barrels for every real barrel. Guess which part of a market dominates if you have a 100 of one thing compared to one of another. There is this idea that real barrels should count for more because, well, they're real, and that this somehow will exhibit itself at settlement time. But this is to misunderstand how the futures market actually works. All of the those paper barrels just get flipped into new contracts purchased again at a 5-7% margin. Real barrels have no priority in this, which is why, of course, the market has lost its price finding function. The price of real barrels is just dragged along after the paper barrels. And this is also true for the spot pricing as well. As long as these non-commercials could exit a position in the market at a higher one than when they entered that was where they made their money. It was the differential between the two. Real world producers were happy because they made a killing on the absolute or underlying price, which had been jacked up year over year since 2004. The situation was made even murkier when OTC trading and then alternative trading platforms were introduced. There was concern about the alternate platforms, i.e. that the price of domestically produced crude might be determined in London or the Emirates but the real opaque portion of the market was the OTC side. There was a Levin bill last winter that was supposed to address this. But he screwed up the language so that oversight went to other futures markets like natural gas but not crude. The CFTC is now talking about reporting requirements but I don't think any have actually been finalized so the crude markets are really not so much different than they were last year. The real question is who is playing them this time around. Are the not so departed investment banks in the markets as agents or principals? Are any of the sovereign wealth funds who certainly have an interest in spiking crude prices involved? The truth is we won't know for a while if ever because to date the market remains significantly opaque.

Nate,

Interesting, your thesis. I would expect, by definition, the football/basketball "market" to be very inefficient if the "line" is used as predictive of outcome. Though I admit that it can be freaky accurate at times.

As to your point about paper demand, I have pondered its impact over the years as it grew. My conclusion, at least till proven wrong, is that we need to view this from a slightly different angle. It cannot be viewed in the classic sense of demand for a commodity, none of the paper folks have any desire, or the ability (especially as to crude oil) to make or take delivery. In truth theirs is a demand for a financial hedge, in many cases this "hedge" should be described as a desire to broaden and diversify their speculation. The truth is that none of the participants in the market, including refiners and producers, as a general rule, sets out to make/take delivery, at least via going though expiry and the exchange procedure. By and large, commercials who do go through a delivery process do so via EFPs and ADPs (Exchange For Physicals and Alternative Delivery Procedures). To get a bit ahead of myself, once the EFP is done, the sorting out down to an ACTUAL delivery has a long way to go, the physical market trades several hundred times the volume physically delivered, and has for at least 35 years I can attest to.

As to your point about the increase in trade volume and open interest, it is beyond your wildest imagination, as I said, I have been a participant in the oil markets from prior to the advent of futures (1981 I think), and I cannot believe the size of the market today. The size and daily trade volume alone argues against there being any truly serious market manipulation. Here are some recent Open Interest numbers, I have used CFTC data which combines the "delta" of the regular board traded options into the standard WTI contract, plus the burgeoning variety of exchange traded products based on WTI futures:

NYMEX Open Interest
"regular" WTI futures 2,592,000
WTI spread options 101,000
WTI calendar options 213,000
WTI Eur style option 181,000
Average Price Options 549,000
Financial settle WTI 174,000
ICE(British exchange)
WTI 492,000

Total Open Interest WTI 4,302,000

These are as you know, contracts of 1,000 barrels, so this represents 4.3 billion barrels, if I add the open interest for Brent futures, we go over 5 billion barrels, or over 60 days of total worldwide production of crude oil. To be honest, I have only taken the main contracts, there are others. Now as to daily volume, I did some research a few months ago and the short version is that if we combine NYMEX with ICE for the major contracts we will go over 1,000,000 contracts traded daily (remember, volume is NOT the same as open interest, you can trade a jillion contracts without a change in open interest). One million contracts is equal to One Billion barrels, or more than 13 days of total world production. Even with margin requirements averaging 5-7% as hugh says, thats a lot of money. So, as to speculators manipulating prices, one needs to define manipulation a little better but the sheer size of the market makes long term manipulation a little difficult to do. As a trader, of course I can start rumors, come in as a seller or buyer at critical times, trade when volume is low to accentuate a move, etc., but this is all momentary. As I said in my original post, I do believe that the advent of "Long Only" funds, changed the tone of the market considerably, and for a while that was supportive. For a while, but look how fast the market fell (markets almost always fall faster than they go up) when the market perception shifted from, "they will be there to buy no matter how high" to "they gotta get out no matter how low". The irony I see is that if you accept the "evil speculators pushed price up" theory, the speculator that did the deed is most likely the small guys buying shares of USO.

As to who holds the positions, you will find that "commercials" positions are roughly 10 times the size of "non-commercials". The non-commercial category was originally established and intended to report the positions of large speculators, including in theory the spec positions held by those who were otherwise considered commercials. My understanding is that today it has the positions of the "funds" including the index funds like USO. I will admit that CFTC reports are a little cloudy, and they aren't folks I ever wanted to talk to. I do believe that the Goldmans, Morgans et al are largely included in the commercial category these days. As always, one of the big drivers on the commercial side is refiner hedging, buy crude/sell products. Most refiners hedge only a % of their business, but to hedge 100% of US crude runs would require approximately 420,000 contracts per month, so for one year, more than 5,000,000 contracts open interest, from this you can see the size of the market.

Sorry to have rambled, hope this is of interest. Here is the CFTC link: http://www.cftc.gov/dea/options/deanymesof.htm