U.S. watchdog eyes energy trading limits

CFTC to hold hearings amid complaints oil speculation is inflating prices

U.S. federal regulators will examine whether the government should impose limits on the number of futures contracts in oil and other energy commodities held by speculative traders, the head of the Commodity Futures Trading Commission said Tuesday.

The agency will hold a public hearing this month to gather views from consumers, businesses and market participants on the idea of new limits for energy futures contracts, CFTC Chairman Gary Gensler said in a statement. It will be the first in a series of hearings in July and August on various topics to determine how the commodities agency “should use all of its existing authorities to accomplish its mission,” he said.

The move comes against a backdrop of concern in Congress and complaints by traders over speculation in the oil futures market. By law, the CFTC sets limits on the amount of futures contracts in some agricultural products that can be held by each market participant to protect the market against manipulation. But for energy commodities – crude oil (CL-FT59.66-0.75-1.24%) , heating oil (HO-FT1.53-0.006-0.42%) , natural gas (NG-FT3.37-0.04-1.26%) , gasoline (XRB-FT1.65-0.01-0.77%) and other energy products – it is the futures exchanges themselves that set the position limits if they desire to do so.

“This different regulatory approach to position limits for agriculture and other physically delivered commodities deserves thoughtful review,” Mr. Gensler said. “It is incumbent upon the CFTC to ensure a fair and transparent price discovery process for all commodities.”

Sen. Carl Levin, D-Mich., welcomed the potential action. Examinations by a Senate investigative panel he heads have found upward pressure on prices for crude oil, natural gas and wheat futures caused by market speculation.
“It is a relief to know that the Obama administration does not plan to stand by silently while inflated crude oil prices top $70 (U.S.) per barrel despite ample oil supplies and low demand,” Mr. Levin said in a statement. “Excessive speculation is distorting prices, undermining our commodity markets and hurting our economic recovery.” Crude oil prices hit an eight-month high last week above $73 a barrel, and some analysts expect prices to surge again soon amid signs that the worst of the economic slowdown is over. On Tuesday, benchmark crude for August delivery shed more than $1 to dip below $63 a barrel.

Sen. Byron Dorgan, D-N.D., one of six senators who voted against Mr. Gensler's confirmation in May, called the agency's move “a positive first step.”

Opponents of Mr. Gensler, who was a Treasury Department official during the Clinton administration, had expressed concern about what they said was his past deregulatory stance and his actions in an area blamed for aggravating the financial crisis – complex investments known as derivatives.

“If these hearings lead to rigorous, federally-imposed position limits across all markets on oil speculators looking for a quick buck at the expense of American consumers, then that will be action I can applaud,” Mr. Dorgan said. “It is only concrete action that will prove the CFTC is finally an effective cop on the beat protecting the wallets of American consumers.”

Oil traders and brokers have griped that funds traded on exchanges, such as the United States Oil Fund, have pumped billions of dollars into energy commodities – enough to artificially prop up energy prices.

For example, benchmark crude oil prices have roughly doubled since March even though government reports show U.S. supplies brimming with surplus oil. Investors have been buying oil barrels not because of traditional supply and demand, but on the expectation that the economy will eventually improve. Some are also buying crude oil as a hedge against inflation, betting that the dollar will get weaker and push the price of energy commodities even higher.

Merrill Lynch estimates that investors are currently plowing $125-billion into commodity indices like the S&P GSCI Commodity Index, up from $80-billion in February. However, much of the increase is due to a rebound in commodity prices, Merrill Lynch analysts said.

In Congress, the House approved measures last fall aimed at curbing excessive speculation and trading abuses in oil and other commodity markets, despite a threatened veto by President George W. Bush. The bipartisan legislation called for giving the CFTC broader authority and limiting the size of the position that traders can hold in certain markets. It stalled in the Senate, however.

The CFTC twice last year took the unusual step of disclosing investigations into the possible manipulation of prices – of crude oil and cotton futures.

Mr. Gensler also said the agency will make improvements to its weekly report on the futures contracts positions held by commercial and noncommercial traders that will provide fuller disclosure of the market data.