Coalition Urges Congress to Curb Oil Speculation

This story appears in the June 15 print edition of Transport Topics.

A coalition of industry groups including American Trucking Associations petitioned congressional leaders to pass legislation to rein in “excessive speculation and opaque trading activity” in oil markets.

“In recent weeks . . . crude oil and refined petroleum products have been trading substantially higher, despite record inventories and low demand,” the group said in a June 3 letter to the leadership of the House and Senate. “Absent strong and sweeping reform, we will continue to witness extreme price volatility and excessive speculation.”

The Commodity Markets Oversight Coalition asked Congress to impose tighter position limits on investors that do not plan to take physical delivery of oil and to allow only “bona fide commercial participants” to obtain exemptions from these position limits.

Position limits spell out the maximum exposure to a commodity traders may have, often by stating the number of open contracts allowed per trader per month.

The group also asked for tighter oversight of energy trading that takes place away from regulated exchanges, such as over-the-counter derivative deals.

Some items on the oversight coalition’s legislative wish list found their way into the language of H.R. 2454, the energy and climate-change bill the House Energy and Commerce Committee approved June 5.

Representatives of ATA referred Transport Topics’ request for comment to the New England Fuel Institute, the group leading legislative efforts for the oversight coalition.

“As far as the language in the cap-and-trade bill, we’re happy with it,” said Jim Collura, NEFI’s vice president for public policy and communications.

The House energy bill still must  clear eight other committees, which have been given until June 19 to consider the proposed legislation.

Among other issues, the House bill in its current form directs the Commodity Futures Trading Commission to establish position limits that “may be held by any person for each month across all markets subject to the jurisdiction of the commission.”

Currently, there are federally mandated position limits only for certain agricultural commodities, such as corn and soybean oil.

For certain energy commodities, including crude oil, position limits are set by commodities exchanges, such as the New York Mercantile Exchange.

Those who hold NYMEX futures contracts for light sweet crude, the most commonly traded contract, are limited to 10,000 net futures for any one month, according to the exchange.

Meanwhile, newly appointed CFTC Chairman Gary Gensler on June 2 told the Senate Appropriations Committee Subcommittee on Financial Services that the commission, with its $146 million budget, “remains an underfunded agency.”

Gensler said the CFTC must hire more enforcement personnel and expert economists in order to effectively regulate a futures industry that does $22 trillion worth of business annually.

ATA and the oversight coalition also are pushing to increase funding for the CFTC.

Meanwhile, on the heels of the oversight coalition’s letter and Gensler’s testimony, Sen. Jon Tester (D-Mont.) of the Senate Banking, Housing and Urban Affairs Committee expressed concern over reports that “[Troubled Asset Relief Program] money is being used to speculate in the oil market.”

Tester commented June 4 during the Senate’s confirmation hearing for Herbert Allison, nominee for assistant secretary of the Treasury for financial stability.

Allison testified that he would investigate “whether these monies are being used for oil speculation.” If confirmed, he will supervise TARP.

In January, Bloomberg News reported that TARP recipients Morgan Stanley and Citigroup Inc. had chartered oil tankers to store oil at sea, presumably to take advantage of a market in which futures prices had outstripped spot prices.

Some individuals and groups, including ATA, have attributed last summer’s record crude oil and fuel prices in part to speculative traders such as large institutional investors or hedge funds that take large positions in oil markets by purchasing derivative financial instruments, but don’t intend actually to take delivery of oil.

However, an international task force co-chaired by CFTC and the United Kingdom’s Financial Services Authority reported in March it “did not find evidence that various categories of financial participants, either individually or as a whole, were systematically driving commodity prices” during last summer’s fuel crisis.

However, the task force said additional oversight was needed to promote greater transparency in energy markets and, “further study of the crude oil market would continue as part of [CFTC’s] longer-term activities.”

On June 3, CFTC reported that commercial traders of the NYMEX West Texas Intermediate crude oil futures contract accounted for 54.5% of open interest, or unsettled long or short positions, in the market. In the same month, noncommercial participants held 38.6% of open interests.