Oil speculators beware: New rules are likely on the way

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Speculators beware: American policy makers may soon tighten regulations with the goal of decreasing the influence of speculators in the oil and related energy markets.

The U.S. Commodity Futures Trading Commission (CFTC) will hold hearings this summer to consider imposing position limits for "all commodities of finite supply," CFTC Chairman Gary Gensler said, The Wall Street Journal reported Tuesday (subscription).

The commission will also review whether swap dealers, index traders and exchange-traded fund managers should be allowed to side-step those limits via special hedge exemptions.
The CFTC is also considering major changes in its weekly large trade report that provides a picture of current market conditions, The Journal reported. One potential change: incorporating information about swap dealers, foreign contracts tied to U.S. futures contracts, and professionally managed funds, such as hedge funds.

Are speculators boosting oil's price?

Currently, large traders are only classified as hedgers or speculators, when in fact some are not only hedging risk, but also simultaneously speculating in the market. Critics of the current system argue its incomplete information creates a picture of the market that may vary considerably from actual conditions, once swap, foreign contracts, and related positions are included.

Supporters of the current system argue that complete disclosure of positions would discourage some institutions who wish to keep their positions -- and in some cases very large positions -- secret from participating in the market, reducing the number of traders, thus hurting liquidity and price discovery.

U.S. Sen. Bernie Sanders (I-Vt.) and U.S. Rep. Bart Stupak (D-Mich.) have called for action to avoid a repeat of last year's frenzy in oil futures that saw oil hit a dizzying high of $147.27 per barrel, which the lawmakers blamed on speculators, Bloomberg News reported Tuesday. In the second half of 2008, oil's price subsequently collapsed amid the end of the leveraging bubble and the start of the recession, falling to about $35 per barrel.

However, in the past six months, oil's price soared about 100 percent to more than $70, prompting concern among public policy officials and analysts that speculators were again 'artificially' boosting oil's price above what supply and demand fundamentals would dictate. These critics argue with oil inventories high and with the U.S. and global economies in their first, simultaneous recession since the end of World War II, oil's price should be considerably lower, at $40 or $50 per barrel, not above $60. Oil traded Tuesday down 23 cents to $63.85.

Further, driven by speculators or not, oil's latest price jump has hurt U.S. consumers at a time when the recession-plagued U.S. economy needs just the opposite – consumers with more disposable income, not less. Gasoline prices have soared about $1 per gallon to roughly $2.65-$2.85 per gallon for unleaded regular, according to data compiled by gasbuddy.com. Every $1 per barrel rise in oil decreases U.S. GDP by $100 billion per year and every one cent increase in gasoline decreases U.S. consumer disposable income by $600 million per year.

Soros cites index funds

Billionaire investor George Soros is in the camp that argues that speculators are helping boost oil's price. In June 2008, Soros told a Senate hearing that oil's surge to $147 that year was caused partly by index funds that buy only oil contracts, Bloomberg News reported Tuesday.

Economic Analysis: Last year, oil trading participants were able to successfully beat-back attempts to increase margin requirements and other regulation changes aimed at limiting positions taken in the oil futures and related energy commodity markets. This year, however, the political calculus has changed: House Democrats have a larger majority and the Democrats also have 60 votes in the Senate. Still, given the unlikelihood of Senate Democrats obtaining a 60-vote (filibuster-proof) majority, look for lawmakers to use the CFTC's regulatory power to tighten futures rules, where possible, without legislation.

Further, the full disclosure of all positions -- including swap and foreign contracts -- would itself be a major public policy change and would give all market participants a more-accurate picture of market conditions. However, it remains to be seen whether the CFTC will feel enough pressure from Sen. Sanders et al. to impose a harsher restriction: aggregate position limits.
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