Professor Mark J. Perry's Blog for Economics and Finance
The chart above shows that open interest (volume) for crude oil futures contracts declined by more than 16% since last November, and yet oil prices kept going up. Less oil futures trading, less speculation, but higher oil prices? Isn't is supposed to be the other way around?
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
6 Comments:
A better reading of that plot is that there was an immediate drop followed by essentially flat interest levels while the price has gone up. Flat interest levels in the face of rising prices indicates an inelastic demand.
If the market is cyclic then transaction rates are smallest when price is highest, and visa versa. Most markets would be "Hamiltonian", which is a shift between kinetic and potential value.
If oil is acting this way, then it is cyclic, showing signs of an incompete market and getting ready to fall in price.
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Obviously the relationship is inverse, if you look across the range of the X-axis. Are you talking about futures contracts, or futures options? A boatload of contracts would imply a rise in future supply, since a futures contract carries an obligation to make or take delivery of the commodity. This must be what the graph represents.
OTOH, if you were talking about futures options, which carry no consequent obligation or requirement to deliver a damned thing, that's something entirely different. In the PDF that I sent you a while back, a hedge fund manager detailed exactly why speculation in the futures options markets is disruptive and self-perpetuating...until it isn't and the bubble bursts.
My point is that there is nothing contradictory in the graph as presented.
skh.pcola
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