Posted by Sada Mosler on August 5th, 2008
(An email exchange)
> (3) The reclassified trader is quite a special one:
> (a) The reclassified trader has interests in only a few
> commodities (I have highlighted the reclassified ones in the
> (b) The trader is heavily focused on crude oil. The
> reclassified positions include 330 million bbl of WTI contracts,
> 45 million bbl WTI calendar spread options, 20 million bbl of
> crude oil calendar swap options, 15 million bbl of European style
> crude oil options and about 15 million bbl of financial WTI crude
> oil futures and options.
> (c) In some of these contracts, the trader’s reclassified
> positions are enormous. For example, in the WTI contract, the
> traders 330 million bbl of reclassified positions amounted to
> about 11% of all the open interest in this contract. In the WTI
> calendar spread options, the trader’s 45 million bbl position was
> equivalent to about 35% of all open interest. So the trader was
> a very big participant in these markets.
> (d) The trader has a few other reclassified interests, mostly
> in natural gas, with little or no reclassified interest in electricity
> derivatives or petroleum products such as RBOB gasoline. But
> the reclassified positions in these markets are tiny in relation to
> open interest and the trader does not appear to have been a
> significant participant, at least from its reclassified positions.
> The CFTC has not revealed the identity of the reclassified trader
> – which remains confidential. But given the scale of positions
> which the CFTC has reclassified, there are only a few types of
> institutions which could be running this type of book: oil
> companies, refiners, distributors, merchants, banks, index funds
> and swap dealers.
> And the CFTC staff obviously examined the numbers and concluded
> that “commercial hedging or risk-management activities did not
> constitute a significant part of the overall trading activity”. In other
> words, the CFTC concluded that this was all or almost all
> Now we don’t have full information about the revisions going all
> the way back to Jul 2007 for all the contracts. But we do have
> information about the basic WTI position for this trader. Back in
> Jul 2007, this trader had a position of about 180 million bbl that
> has been reclassified. But by Jul 2008, this traders’ reclassified
> position had grown to 330 million bbl. This traders’ positions
> have been growing faster than the market as a whole so its
> share of total open interest in the WTI contract has risen from
> 9.1% in Jul 2007 to a massive 11.5% in Jul 2008.
> The reclassification is so large it affects understanding of the
> whole market. Under the old classification, non-commercial
> traders accounted for about 38% of the total open interest in
> the WTI contract. But now that one large trader has been
> reclassified, non-commercial traders account for 49% of the
> market — half rather than one third.
> Assuming that one individual trader did increase their already
> large 180 million bbl position in the WTI spreads in Jul 2007 to as
> much as 330 million bbl in Jul 2008, and that the additional
> positions were not hedging an underlying exposure, it seems
> impossible that the massive accumulation would not have
> disturbed the market at least somewhat.
> It is interesting, though perhaps coincidental, to note that
> crude oil prices peaked around Jul 4-14, a few days before the
> CFTC announced its reclassification on Jul 18.
> These positions are so large that they clearly exceed the
> NYMEX position limits by a substantial margin (no more than
> 20,000 contracts in all months; no more than 10,000 contracts
> in any one month; and no more than 3,000 contracts in the last
> three days of trading in the spot month). Presumably, the
> holder of these positions has received a waiver from NYMEX and
> the CFTC on the basis that it is hedging under the normal
> hedging exemptions. But if the CFTC no longer believes that the
> holder of these positions is using them for “hedging or risk
> managing” to any significant extent, will they still be allowed to
> qualify for the waiver (a question I am not qualified to answer).
any idea who holds that large position?
A liquidation of this size is more than sufficient to drive down futures prices and even cause a liquidation of some portion of spot inventories.
The Saudis could keep prices high as this happens but that would make it obvious they are setting prices as swing producer.
So instead, as in Aug 06 during the Goldman liquidation, they instead lower their prices as futures prices fall, but with a small lag, until the liquidation is over.
They then go back to setting/hiking prices
> The CFTC has published revised Commitment of Traders data
> back to 3 Jul 2007 to take account of the reclassification of one
> or more positions from the commercial to the non-commercial
> CFTC has published both the original and the revised data for a
> single point in time (15 Jul 2008) to help users understand the
> impact of the change. It is has NOT published identical
> historical data sets of both original and revised data. However,
> I still have the complete data as originally reported — and of
> course the revised numbers from the CFTC website. Comparing
> the two series gives a fascinating insight into what the CFTC
> has done (this is a little sneaky because I don’t think the CFTC
> staff meant to identify the position of an individual trader quite
> so publicly).
> (1) The revisions over the entire period from Jul 2007 onwards
> affect just one very large participant in the crude oil market
> each week (and presumably the same participant over time).
> (2) In each case, the positions seem to have been almost
> entirely in the time spread. A large number of positions that
> were originally reported as separate “long” and “short”
> commercial positions are now being reported as a combined
> non-commercial “spread” position with a small balance reported
> as an non-commercial short position each week.
> (3) The attached chart gives some indication of the impact of
> the reclassification back through Jul 2007 (as far back as the
> CFTC staff have so far been able to recalculate the data). The
> scale of the reclassified position is very large (see chart) and it
> has been growing over time. The position which CFTC has
> reclassified has grown from around 190,000 contracts in Jul
> 2007 to 320,000 contracts in Jul 2008. By the middle of Jul this
> year, this one massive trader held spread positions equivalent to
> about 25% of the entire market for non-commercial spread> positions.
> (4) Interestingly, we can also look at the residuals — ie the
> part of the commercial long-short position that was not
> reclassified as a commercial spread position. The residual has
> varied over time between about 1,000 contracts (1 million bbl)
> and 11,000 contracts (11 million bbl) and every week it was a
> residual short position rather than a long one. None of the
> CFTC reclassifications affect the non-commercial long side of
> the market at all. It doesn’t necessarily imply that this trader
> was always short overall (they might have had offsetting long
> positions somewhere else). But interestingly, those short
> positions have been gradually cut over time (see chart)
> although as of the middle of last month (15 Jul 2007) the
> reclassified trader was still net short almost 4,000 lots (4 million