I want to thank you for all of the information you assemble on your site. Your writings make me delve back into my old textbooks and writings in search of more information on personal economics, business, and consumer trends.

I have a small group of friends that gets together to discuss the markets, trends, wealth protection, etc., and we have been battling for about a month now on oil prices. I was wondering if possibly you could expand on our main battle line:

Is the current high price of gas, at the pump, being artificially propped up by oil companies’ futures contracts?

A commodity broker in my group floated this idea as a “what if”. What if some of the oil majors bought contracts months ago betting on higher prices? Could they in effect control or even manipulate their investment by artificially keeping prices high to cover their contracts?

With the amount of money companies allocate to locating new oil fields, new rigs, and new technology, how can the massive profit levels of Exxon, Citgo, et al be explained?

EXPLANATORY NOTES:
Reportable Positions - Clearing members, futures commission merchants, and foreign brokers (collectively called "reporting firms") file daily reports with the Commission. Those reports show the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations. (Current Commission reporting levels can also be found at the Commission’s website noted above.) If, at the daily market close, a reporting firm has a trader with a position at or above the Commission’s reporting level in any single futures month or option expiration, it reports that trader’s entire position in all futures and options expiration months in that commodity, regardless of size. The aggregate of all traders’ positions reported to the Commission usually represents 70 to 90 percent of the total open interest in any given market. From time to time, the Commission will raise or lower the reporting levels in specific markets to strike a balance between collecting sufficient information to oversee the markets and minimizing the reporting burden on the futures industry.

Commercial and Non-commercial Traders – When an individual reportable trader is identified to the Commission, the trader is classified either as "commercial" or "non-commercial." All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in the Commission's regulations (1.3(z)). A trading entity generally gets classified as a "commercial" by filing a statement with the Commission (on CFTC Form 40) that it is commercially "...engaged in business activities hedged by the use of the futures or option markets." In order to ensure that traders are classified with accuracy and consistency, the Commission staff may exercise judgment in re-classifying a trader if it has additional information about the trader’s use of the markets.

A trader may be classified as a commercial in some commodities and as a non-commercial in other commodities. A single trading entity cannot be classified as both a commercial and non-commercial in the same commodity. Nonetheless, a multi-functional organization that has more than one trading entity may have each trading entity classified separately in a commodity. For example, a financial organization trading in financial futures may have a banking entity whose positions are classified as commercial and have a separate money-management entity whose positions are classified as non-commercial.

Nonreportable Positions - The long and short open interest shown as "Nonreportable Positions" are derived by subtracting total long and short "Reportable Positions" from the total open interest. Accordingly, for "Nonreportable Positions," the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

Generally, Commercials are producers and processors of that commodity, Non-commercials (Large traders) are funds and other large trading interests engaged in speculation rather than hedging. And Non-repotables are usually small funds or the general public.

Attached are charts that hopefully will help to answer how the largest market participants are positioned (what they have been doing with their money). The legend for the charts with indicators that seem to resemble DMI is Large traders=blue, commercial=red.

The Commercial or COT index is based on 3 years of data (yes I do use different time frames) and gives a buy alert when greater than or equal to 80 and a sell alert when less than or equal to 20. Therefore it is inverted. (emphasis added by CHS.)

Commercials that are long the actuals (oil exporters) must sell futures in order to hedge. Processors (refineries), are interested in the paying the cheapest price for raw materials and because they are short the actuals must buy futures in order to hedge the risk of higher prices.

The Large Trader index is read like a stochastic oscillator and is probably more intuitive to interpret.

Do Commercials both hedge and speculate? Yes. Do they protect profits? Yes, this is the purpose of the futures markets. Is there manipulation? Yes, but from the charts I have provided you will probably conclude that in the end prices go where they must as a result of the actions of the heavy operators.

I did not invent the COT data or the index as it is available commercially but I choose to create my own database from the CFTC to create my own indicators and charts.

Without examining balance sheets it would be hard to tell where the money came from. I speculate that inexpensive credit and not having to expense labor (as explained before) may be helping these companies.

If you study the chart that has Commercials and Large Trader combined you will see that in most instances they are equally opposite. There must be a buyer for every seller. Notice the price action when Commercials become relatively heavy net long or short or vice versa for Non-commercial or Large Traders.

I keep track of Open Interest as well and from a historical perspective OI in most futures markets has set new precedents. I asked a friend of mine who has been at this business for 30 years what could be the cause of this and his answer confirmed what had been my suspicion, hedge funds. Apparently there is so much liquidity that hedge funds are flooding that money into the futures markets looking for return (too much money chasing too few goods?). When systems are stretched to and beyond certain limits they become increasingly vulnerable to shocks. At some point things are going to get very interesting.