Determinants of trader profits in commodity futures markets

Abstract Using a unique proprietary data set of positions held by all large traders in the crude oil, gasoline, and heating oil futures markets, we use actual trader profits to test the predictions of various commodity futures pricing models. We find strong support for: (a) the risk premium hypothesis -mean hedger profits are significantly negative while speculator profits are significantly positive -and (b) the hedging pressure hypothesis -traders (whether speculators or hedgers) who hold long (short) positions when likely hedgers in aggregate are net short (long) have significantly higher profits than traders whose net positions are aligned with likely hedgers. We find also that profits on long positions vary inversely with inventories and directly with price volatility, as predicted by the modern theory of storage. While we find no evidence of profits derived from short term momentum after controlling for hedging pressure, our results provide support for the notion that momentum in commodity futures markets may be due largely to hedging pressure. JEL Classifications: G12, G1