From oil price speculation to higher inflation?
I am always careful when someone claims that speculators in commodity futures markets drive up prices for the commodities in the physical market. The studies I have seen on that topic so far all showed that speculators can increase the volatility of futures prices but have no significant long-term effect on the price level. However, I am still trying to find holes in a study by Carlotta Breman and Servaas Storm that claims a price effect of oil speculators during the recent inflation spike.
There is no doubt that the rise in oil prices in 2021 and then after the Russian invasion of Ukraine in February 2022 was the main driver of the inflation spike in 2022 and 2023.
Oil prices and US inflation
Source: Bloomberg
The question is how much of that oil price spike was due to supply shortages and how much was due to excessive speculation and speculative long positions by futures traders. In their study, Breman and Storm used an extensive model developed in 2016 that allows researchers to differentiate between fundamental supply and demand (using variables like official supply data and warehouse inventories) and speculative demand (using futures positioning of producers and non-producers). Adapting it to the 2021-2023 period, they not only found a statistically significant increase in the oil price of 24-48% due to excessive speculation by oil traders but also a statistically significant causality of speculative trades on the oil price.
This effect has by now subsided showing again that speculators cannot influence oil prices in the long run, but if true, then speculators added some 0.75-1.5 percentage points to US inflation over a period of about two years. And consequently, forced the Fed to hike interest rates more than it otherwise would have.
I start by saying that I am also a supporter of the idea that “speculators can increase the volatility of futures prices but have no significant long-term effect on the price level.” I also read: “This effect has by now subsided”. Could this be due to the fact that there is nothing left to speculate on and not only the operators but also the common people have incorporated in their actions the fact that there is a war in Ukraine and that the state of things is this and cannot get worse? Let me explain better: speculation remains the reflection of what is nevertheless linked to what one thinks will be the official supply data and warehouse inventories. And the fact that the cost of Russian commodities increased months before the war would be an indication in this sense. Speculation would be a natural element of price formation. But it could be me who did not grasp the meaning of the study. I hope I have been able to explain my thoughts.
Or maybe the surge in inflation was caused by the printing of money, in connection with the pseudo-pandemic, and now huge budget injections into the United States only support inflation, and speculators simply follow the trend and strengthen it?, as for example, now the trend in oil is upward, but every day large traders open short positions, squandering billions in attempts to lower oil prices, for the sake of replenishing stocks before the elections?