Reining in Trading of Cash Settled crude Oil Contracts

After closely observing commodity markets for more than a decade, one conclusion becomes unavoidable: the system has drifted far from its original purpose. Commodity futures were designed to help producers and consumers manage risk. Instead, they have become playgrounds for speculative capital. The overwhelming dominance of cash-settled crude oil contracts —now estimated to account for over 90% of global energy trades—has allowed speculation to overshadow genuine hedging. It is time to reconsider this model and work toward a gradual reduction of trading in cash-settled crude oil contracts.

Cash settlement fundamentally changes the nature of commodity markets. When traders can enter and exit massive positions without ever taking delivery, the market becomes unanchored from physical realities. Price discovery—the core justification for futures markets—suffers. Prices increasingly reflect sentiment, algorithms, and fund-driven volatility, rather than real supply–demand conditions. Producers are left navigating distorted signals; consumers face unpredictable swings that have little to do with harvests, inventories, or shipping flows.

The ultimate beneficiaries of this system are large speculators—most notably fund managers—who profit from volatility without any connection to the underlying commodity. With no storage constraints or delivery obligations, speculative capital can dominate volumes and dictate market direction. Meanwhile, genuine hedgers find themselves pushed to the margins of markets supposedly created for them.

None of this suggests that cash-settled contracts should be banned overnight. Liquidity matters. But the current balance is unhealthy and unsustainable. A phased rebalancing is both practical and necessary. Exchanges should gradually increase the share of physically deliverable contracts, strengthen warehouse receipt systems, and enforce stricter inventory reporting. Regulators should impose higher margins on purely speculative cash-settled positions to curb excessive leverage.

Physical delivery brings discipline. It forces markets to acknowledge storage capacity, transport costs, stock levels, and real economic flows. It restores transparency and aligns futures pricing with fundamentals. More importantly, it reduces the outsized influence of speculative capital on commodities that are crucial for food security, energy planning, and industrial production.

Commodity markets must serve the real economy, not the speculative ambitions of a few. The dominance of cash-settled trading has diluted that purpose. A deliberate move toward more physically grounded trading is essential to restore credibility, stability, and fairness in global commodity markets.