Here’s an interesting chart from the EDHEC-Risk Institute’s latest report on long-short commodity investing:
For those who believe that a build-up in long positions by money managers was responsible for fuelling the 2008 record rally in commodities, the above seems to suggest that it was also the slashing of the long open interest, alongside a build up in short positioning, which may have fueled the 2008 commodities crash — but only once the last short squeezes were fully eliminiated from the market.
SemGroup’s role as one of the last remaining shorts to be squeezed from the market has, for example, been well documented.
But what’s really interesting is what the chart tells us about commodity positions post the 2008 crisis.
Each time money managers begin to accumulate short positions, they are seemingly forced out by something– most recently in and around July 2010, and before that in September 2009. At the same time, once the shorts subside, the accumulation of long positions resumes immediately. What we are seeing is thus a constantly rebounding concertina effect. Whenever shorts dare to meet longs, the streams are restricted from meeting (to use Ghostbusters parlance). The last time this happened, by the way, was coincidentally when QE2 was announced.
Of course, it seems to take an ever greater proportion of “money manager” length just to keep the S&P GSCI’s rally supported (that is, the S&P GSCI’s performance has underperformed the buildup of fresh length). What’s more, the latest divergence (between the long and short open interest) is larger than that seen in 2008.
Which makes us wonder, what happens if the lines begin to cross again?
It’s a shame this chart only goes up until January 2011. (We’d be very keen to see an updated version.)
Interestingly, the authors of the report draw exactly the opposite conclusion. In their opinion the chart is not reflective of money manager influence on commodity prices.
Or as they put it:
The paper also studies whether the observed financialisation of commodity futures markets (as evidenced by the increase in the long, as well as short, positions of speculators over time) has led to change in the conditional volatility of commodity markets or to changes in their conditional correlations with traditional assets. Our results find no support for the hypothesis that speculators have destabilised commodity prices by increasing volatility or co-movements between commodity prices and those of traditional assets. Interestingly, this conclusion holds irrespective of whether speculators are labelled as “non-commercial” in the CFTC Commitment of Traders report or “professional money managers” (i.e., CTAs, CPOs and hedge funds) in the CFTC Disaggregated Commitment of Traders report. Thus the analysis presented here does not call for a change in the regulation relating to the participation of professional money managers in commodity futures markets.
We guess a picture tells a thousand words…
Related links:
The curious case of super-backwardation – FT Alphaville
Just when it makes sense to sit in oil futures… – FT Alphaville
Are index funds the new swing producers? – FT Alphaville
The WTI-Brent anomaly – FT Alphaville
