The role of financial investors in commodity markets is overestimated, veteran oil trader and CEO of the Dubai Mercantile Exchange Tom Leaver told CNBC.com.
The characterization of speculators as “a guy in a black hat sitting in the corner manipulating the market” was shown to have little supporting empirical evidence after the commodity price spike in 2008, Leaver said in an interview.
“For every buyer there is always a seller on the other side, otherwise you don’t have a price. Price is part of that equilibrium.”
Instead, he said, the complexity of the supply-demand equation and the ever-changing economic outlook in developed markets are the root causes of volatility in commodities prices.
“There’s just such an overarching confusion, with sovereign debt defaults, what’s going to happen in Greece, Portugal, Ireland, even the US in terms of municipal bond defaults, because a lot of the states in the US are approaching bankruptcy. That all adds up to volatility,” he said.
“I’ve never seen a situation, I don’t think anyone has, where you have the combined uncertainties of geopolitical risk – the Arab Spring of popular revolution for representation and civil liberties – combined with the natural disasters – the Tsunami and nuclear meltdown in Japan," Leaver, who has been involved in the market for more than 35 years, explained.
“You’ve got demand destruction in one part of the world, you’ve got supply disruption in others, Libya in particular. We’ve got currency risks that are very volatile… and also the connectivity between all of these markets. Currencies, commodities and fixed income are all very much interrelated and are all asset classes in their own right."
“There’s a lot of cash sloshing around and that can move markets a lot more than people are used to,” he added.
Market 'Overrun With Speculators'
But others disagree, and some analysts have been quick to point the finger at speculators after a broad sell-off across many commodity markets ended a sustained uptrend on Thursday May 5.
John Ventre, portfolio manager at Skandia Investment Group, says that there is considerable evidence to support the theory.
“We’re seeing more indications that the numbers of speculators versus physical players and hedges is much larger than it’s ever been before,” he told CNBC.com.
The market is “overrun with speculators due to the sheer amount of money that’s been run in CTAs and momentum strategies,” he added.
Commodity trading advisors, or CTAs, are computer-driven vehicles which use quantitative analysis to invest in futures markets.
“There’s been a glut of supply in West Texas Crude for a number of months, which would normally indicate that pricing should be moderated, not a very powerful rally, but a more or less steady rally over the past few months, despite the fact that there’s a lot of supply around, so much that the storage tanks are full, so it does indicate that there is a lot of speculative action,” Ventre said.
“What also supports that is the nature of the sell-off on Thursday last week. The stop orders running into other stops. It’s speculators that have stop-loss orders, not physical players," he said.
"I think on balance the speculators tend to get a bit levered up on these trades, the CTAs, the trend followers had a really bad start to the month, which indicates that they not only had these positions but they had them in big size,” Ventre added.