Energy Futures Market Trading Versus Physical Commodity Usage: A playground for manipulation or a miscalculation?

Ronald Ripple ()

No 603, Research Papers from Macquarie University, Department of Economics

Abstract: The relationship between energy futures trading volume and physical commodity usage is evaluated with the aim of demonstrating the correct method of calculation. This relationship has been incorrectly calculated and the misleading results have been offered up as evidence of excessive speculator activity leading to higher and more volatile prices, on the one hand, and to support claims of high levels of market liquidity and transparency, on the other. It is shown that rather than constituting large multiples over physical usage the futures trading activity represents a fraction of usage. These fractions of physical usage represented by futures trading volume cannot support suggestions that futures markets are playgrounds for non-commercial market manipulators. Nevertheless, there is still strong evidence that the energy futures markets provide a valuable basis for price discovery and risk mitigation, since a significant share of physical usage is represented by futures market activity.

Keywords: Futures contracts; trading volume; consumption; crude oil; natural gas (search for similar items in EconPapers)
JEL-codes: G18 Q48 (search for similar items in EconPapers)
Pages: 12 pages.
Date: 2006-05
New Economics Papers: this item is included in nep-ene, nep-fin and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:mac:wpaper:0603

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