Abstract
This paper aims to examine trading activity and the relationship between futures trading activity by trader type and energy price movements in three energy futures markets natural gas, crude oil and heating oil. We find that the level of net positions of speculators are positively related to future returns and in contrast net positions of hedgers are negatively related to futures price changes in all three markets. The changes in net positions are relatively more informative compare to the level of net positions in predicting price changes in related markets
Highlights
Sharp price movements of energy prices in the mid-2000s led to concerns by policy makers and regulators
On the other hand hedging pressure theory (Keynes, 1930) states that hedgers who are typically net short on the futures markets offer a risk premium to attract speculators to take a long position and provide liquidity to hedgers and this might result in changed price levels
Our results for natural gas futures markets are in contrast with Sanders et al (2004) who find for energy markets commercials are net short and non commercials are net long, departure from their results stem from the use of the extended and more recent data set which includes the substantial increase in trading activity in commodity futures contracts whereas Sanders' data set ends in December 28, 1999
Summary
Sharp price movements of energy prices in the mid-2000s led to concerns by policy makers and regulators. On the other hand hedging pressure theory (Keynes, 1930) states that hedgers who are typically net short on the futures markets offer a risk premium to attract speculators to take a long position and provide liquidity to hedgers and this might result in changed price levels.. On the other hand hedging pressure theory (Keynes, 1930) states that hedgers who are typically net short on the futures markets offer a risk premium to attract speculators to take a long position and provide liquidity to hedgers and this might result in changed price levels.4 Both hedging and speculative pressures assume that changes in futures prices are affected by changes in hedgers' and speculators' open interest positions
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