U.S. Moves Toward Stiffer Rules to Curb Oil-Market Speculators

This story appears in the Aug. 3 print edition of Transport Topics.

The Commodity Futures Trading Commission last week began laying the groundwork for a stronger regulatory hand over oil traders and investors, with a series of hearings and a report on trading patterns that could lead to limits on some purchases of futures contracts.

Launching hearings July 28 on possible oil market speculation, CFTC Chairman Gary Gensler said it was the commission’s responsibility “to protect the public from the undue burdens of excessive speculation.”

“Our duty is to protect both the market participants and the American public from fraud, manipulation and other abuses,” Gensler said. “I believe we must seriously consider setting strict position limits in the energy markets.” Position limits cap how many futures contracts individual investors are allowed to hold in a specific commodity.

The tone set by Gensler, who was appointed by President Obama, was an apparent reversal of the CFTC’s position last year that excessive speculation was not to blame for soaring fuel prices.

Besides holding hearings, the CFTC was poised to release this month a report containing trading data that some believe will shed light on whether excessive speculation has influenced the crude oil market.

Leaders in trucking and other industries have questioned why diesel prices have risen this spring and summer, even though demand is weak and supplies are high because of dramatic drops in tonnage.

The CFTC report is based on what a commission spokesman said was an ongoing “special call” in late 2008 for information from 43 trading and investment firms that has created a steady stream of data on position limits and hedge exemptions, which allow commodity users to buy more contracts than do investors who don’t actually take possession of a traded commodity.

The commission issued a statement last week that contradicted some press reports that said its soon-to-be released report would conclude that large investors hold excessive numbers of oil futures contracts. However, the report is expected to contain new data about who is buying oil futures and how many they are buying.

“The reports [CFTC] has released in the past haven’t given a detailed enough breakdown for anyone to come to any sort of conclusions about the role that speculation plays in the market,” said Chris Barber, an oil market analyst with Energy Security Analysis Inc., Wakefield, Mass., told Transport Topics.

In the past, commodities futures markets were used mainly by investors connected to particular commodities, but in recent years, they have attracted hedge and pension fund investors. “The amount of money from both groups has increased significantly in the past few years,” Barber said.

Consumer and industry groups heavily dependent on fuel have complained that the new investors are holding more positions in the oil markets than should be allowed.

Barber said that some market observers believe that investment banks, dubbed “swaps dealers,” might buy oil futures on behalf of large investors and use commercial hedge exemptions improperly.

“That’s the one [CFTC] is really debating, the swaps dealers, the banks that have these exemptions and whether they should have them,” Barber said.

Among those scheduled to testify at a CFTC hearing Aug. 5 is Steve Graham, vice president of fuel purchasing for Schneider National Inc., who will appear on behalf of Schneider and ATA.

Rich Moskowitz, regulatory counsel for American Trucking Associations, said the federation’s position is that the CFTC “should have a complete understanding of all futures trades across all trading platforms.”

In addition, Moskowitz said, “We’re asking the commission to establish reasonable position limits and draw a distinction between commercial and noncommercial participants.”

“I’m sure the commercial players will keep their exemptions,” Barber said.

The CFTC hearings and any subsequent action the commission takes, he said, are “more geared at the swaps dealers, but the tricky part with that is that swaps dealers also provide customized positions for commercial players as well, so, most airlines don’t go to the market directly. They’ll go through a bank.”

The record price swings in gasoline and diesel over the past 15 months have increased pressure for action by both regulators and legislatures against excessive speculation.

Several members of Congress have introduced legislation to limit what they called excessive speculation. In the latest congressional salvo, Rep. Peter DeFazio (D-Ore.) on July 29 introduced a bill that would tax crude oil derivatives trading to fund the nation’s transportation system.

DeFazio said the tax on derivatives trading would “crack down on oil speculators who are driving up the price of oil and causing massive volatility in the market.”