Speculation and the 2008 oil bubble: The DCOT Report analysis Damir Tokic n ESC Rennes, International School of Business, 2 Rue Robert d’Arbissel, 35065 Rennes Cedex, France article info Article history: Received 9 July 2011 Accepted 25 February 2012 Available online 20 March 2012 Keywords: The 2008 oil bubble Speculation The DCOT Report abstract This article analyzes the CFTC’s Disaggregated Commitments of Traders (DCOT) Report to get more insights into the behavior of different traders during the 2008 oil bubble. The analysis shows that: (1) the Money Manager category perfectly played the oil bubble, got in early and started selling shortly before the bubble peak; (2) the Producer/Merchant/Processor/User category and the Nonreportable category were covering their short positions into the peak of the bubble; (3) the Swap/Dealer category benefited while the price of oil was rising, but incurred heavy losses as the price of oil collapsed; (4) we find no indications of speculation by any group of traders via the positive feedback trading or rational destabilization; and (5) we do, however, criticize the commercial hedgers for failing to arbitrage the soaring oil prices in 2008. & 2012 Elsevier Ltd. All rights reserved. 1. Introduction Less than 3 years after the peak of the 2008 oil bubble, the price of crude oil spiked again in early 2011 (Exhibit 1). Similarly, in 2008 and 2011, the prices of other commodities were on the rise as well, which caused higher food prices globally. As a result of high oil prices and rising food prices, in 2008 we had the ‘‘rice riots’’ in Southeast Asia. In 2011, we had ‘‘the Arab spring’’. By drawing more parallels, the price of oil was rising in 2008 despite the US recession, while in 2011 the price of oil was rising despite the fact that the global economy was still on a ‘‘life support’’ to overcome the 2008 recession (thus without any organic sustain- able global economic growth). Yes, the Arab spring posed a potential threat to global oil supplies in early 2011, and there was a minor oil supply disruption due to the conflict in Libya. Yet, the US oil supplies remained at record levels and there was no real indication of any global oil shortage. Thus, just like in 2008, the price of crude oil seemed to be irrationally high in 2011 based on supply/demand fundamentals. Regulators have studied the 2008 oil price bubble and wowed to prevent future oil price bubbles by curbing speculation. However, based on the 2011 oil price action, it seems that these efforts to curb speculation were ineffective. This study argues that, since we still do not have enough information to understand how the 2008 oil bubble inflated; any regulation based on incomplete information may be ineffective. The academic literature mostly finds that speculation played only a minor role in the 2008 oil bubble, if any. For example, Hamilton (2009) doubts that speculation could have caused the oil bubble in 2008 at all; Kaufmann and Ullman (2009) conclude that both, changes in fundamentals and speculation, explain the oil price spike in 2008; Cifarelli and Paladino (2010) find that speculation played a role in crude oil market in 2008, although they caution that they had difficulties in their modelling and interpretation of their results; Kesicki (2010) finds that the impact of speculators during the 2008 oil bubble was small and short term relative to fundamental trends in supply and demand for physical crude oil. Till (2009) finds that speculative positions in the exchange traded oil derivatives have not been excessive in 2008. A recent OECD (2010) report on speculation in commodity futures acknowledges that the open interest in futures markets significantly increased during the period from 2006 to 2009, primarily due to the heavy inflows from the index funds. Masters (2008) finds that there was a high positive correlation between the rising oil prices and the open interest in 2008, which was his key argument in favor of speculation, specifically by the index funds. However, the OEDC (2010) report points out that a high correlation does not imply causation. Tokic (2010) takes a completely different view and blames the Fed for the rising oil prices in 2008. This study extends Tokic (2011) study, in which he argues that perhaps we should look at all participants in crude oil futures markets to determine whether there was any significant spec- ulative activity during the 2008 oil bubble. However, Tokic (2011) analyzes only the positions of the Producer/Merchant/Processor/ User category from the CFTC’s Disaggregated Commitments of Traders (DCOT) Report and observes that commercial hedgers reduced their net short positions leading to the peak of the oil bubble in 2008. Thus, he raises the possibility that the commer- cial hedgers engaged in an unwilling positive feedback trading by Contents lists available at SciVerse ScienceDirect journal homepage: www.elsevier.com/locate/enpol Energy Policy 0301-4215/$ - see front matter & 2012 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2012.02.069 n Tel.: þ33 0 2 99 33 48 64. E-mail addresses: Damir.tokic@esc-rennes.fr, tokicd@macrotheme.com Energy Policy 45 (2012) 541–550