Speculative Limits and Hedging: How will this affect crude oil?

With the recent correction from 135.09 in crude, there’s been a lot of talk about the pullback we’re seeing today.  Crude has closed at 124.37.  In my analysis this is an initial buying opportunity (which extends to 120) but there is an undercurrent here – it’s an election year and the politicians are having the CFTC look at speculative limits and hedging.  And it’s the hedging story that has crude oil pulling back.

The talk is that if hedging exemption are redefined (read:  more strictly enforced) then much of the speculative positions in crude oil will liquidate their positions and that has some *experts* talking about a pullback to $100.00.  Now that’s a significant pullback from here especially considering that we’re heading into hurricane season.

By the way, just so everyone here understands, the rules related to “hedging exemptions” is what allows market participants to exceed position limits for trading crude oil. 

Is there comparatively more speculation in the current market?  No doubt there is.  A simple look at volume on a weekly chart comparing 2006 and 2008 clearly shows the increase in participation. 

The hedging factor is interesting but the talk of a sudden pullback to 100 is a little “speculative” in and of itself!  Hedging in it’s purest sense is a position designed to offset risk.  The word “hedge” has lost that meaning and has been reduced to a “buzz word” in the sense of hedge funds.

If specultive limits are enforced, the “hedged” positions will not enjoy their exemptions, liquidate, and drive crude lower. 

With November quickly approaching, that’s exactly what politicians are looking to do and are presurring the CFTC. 

I’m not saying it’s correct or incorrect, it’s just what is moving the crude oil market right now.

There is also talk of higher margin requirements, this too would cause some of the speculative positions in crude to move to other (lower margin) markets.

Crude is not alone in the CFTC investigations.  Cotton is another market that is being investigated after a run up.