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Regulators Step Up Probes Of Trading in Oil Markets

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Regulators Step Up Probes Of Trading in Oil Markets

May 30, 2008

U.S. regulators disclosed a broad nationwide probe into potential oil-market manipulation and said they are expanding surveillance of energy markets.

The move Thursday by the Commodity Futures Trading Commission, including its unusual announcement of an investigation in progress, comes after crude-oil prices topped $130 a barrel last week and tested all-time highs. On Thursday, light, sweet crude for July delivery settled $4.41, or 3.4%, lower at $126.62 a barrel on the New York Mercantile Exchange.


Lawmakers in Congress have been pressing regulators to crack down on manipulation, as politicians seek to demonstrate ahead of the fall elections that they are responding to soaring gasoline prices.

“It’s important that people who are paying high gas prices understand the CFTC is on the case and that we’re closely monitoring and in this instance deeply investigating any potential abuse in this important energy market,” said Bart Chilton, a CFTC commissioner.

Many economists and oil-industry executives say possible shenanigans by market traders have little or nothing to do with the high price of oil. They maintain that the rise is mainly due to fundamental factors such as rising demand, constrained supplies and the weak dollar.

Still, suspicions have lingered that speculators have helped drive oil prices higher. At a series of congressional hearings over the past month, energy consumer groups and some financial insiders have contended that large investments in commodity futures by hedge funds and pension funds are distorting prices.

Congress is weighing proposals to increase collateral requirements for futures traders and otherwise restrain their activities. The implied hope is that such moves will help rein in prices that have almost doubled in a year.

The CFTC’s announcement about its oil investigation suggested a single, broad probe that began in December 2007. But people familiar with its enforcement priorities say the agency is pursuing multiple oil investigations, and that many of them relate to one another. CFTC enforcement chief Gregory Mocek said the agency has about 60 manipulation investigations open in various commodity markets.

The CFTC has expanded an investigation, disclosed previously by The Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price-reporting system run by Platts, a unit of McGraw-Hill Cos. One suspicion is that energy companies and traders have at times issued a flood of orders during a time window used by Platts to determine its reported prices for physical oil transactions, then used the potentially distorted prices to make profits in other markets. Platts has said its system has safeguards to protect against manipulation. Subpoenas on the matter have gone out in several stages, people familiar with the cases say.

The agency has also been questioning traders about similar activity in the jet-fuel market, people familiar with the matter say.

Another area of concern for CFTC regulators is whether the owners of crude-oil storage tanks use their knowledge to make bets on oil-futures markets. In theory, the owner of a tank could issue misleading information about the tanks being full or empty, leaving the wrong impression about whether oil is in plentiful supply. Then they could make trades to profit on the misunderstanding.

Artificial Price

Unlike most stock markets, insider trading isn’t generally illegal in commodities trading. An oil company can take advantage of inside information about its production outlook when it makes trades. However, if traders intentionally create an artificial price and use it to make money, charges of manipulation may arise.

The CFTC regulates one of the fastest-growing financial markets with a fraction of the budget of the Securities and Exchange Commission. In the past, critics have called it a weak enforcer, but its small enforcement staff has sought to bring more ambitious cases in recent years, particularly in the energy markets.

The CFTC doesn’t oversee all U.S. commodities trading. Large speculators such as hedge funds often use unregulated over-the-counter platforms, whose prices may affect prices on regulated markets. Mr. Chilton, the CFTC commissioner, said regulators are looking at cases where traders have made simultaneous bets on unregulated and regulated markets, in particular in West Texas Intermediate crude-oil contracts. He said he wants to know “whether there’s any possibility for attempted manipulations as a result.”

Apart from its investigations into specific allegations, the CFTC said Thursday it will require more information in general from large traders. It wants to know about their bets in commodity-linked index investments as well as speculative trades that they are able to place via Wall Street dealers, often in large quantities.

The CFTC’s acting chairman, Walt Lukken, said investors flooded into commodities after a credit crisis hit the financial markets last summer and risky bond investments lost popularity. “There was this enormous flight to safety,” he said. “This is something we have to really drill down on in terms of where the money is coming from, and what its impact is on the markets.”

He stressed that the CFTC’s move to require more information from institutional investors is separate from any probes into illegal trading activity.

“I don’t think anybody is indicating that index-fund investors, as a class, are causing broad illegal manipulation of the markets. It’s a different issue from the crude oil investigation,” he said.

The CFTC’s chief economist testified to the Senate last week that CFTC data on large traders shows that price increases in commodities “are largely unrelated to fund trading.”

“There’s incredibly heightened scrutiny on these markets, and anybody who does business in these markets faces a lot of regulatory risks,” said Paul Pantano, a Washington lawyer who represents many energy traders. “Commercial parties and speculators are operating in a market where the rules about what is considered manipulative conduct versus legitimate trading activity are not very clear.”

Providing Trading Data

The CFTC said it reached an agreement with IntercontintentalExchange Inc. and the Britain’s Financial Services Authority to require more information about the oil trading that takes place on the exchange’s ICE Futures Europe platform.

While ICE oil futures are traded electronically on computer terminals across the U.S. and have prices tied to oil futures offered by rival New York Mercantile Exchange, owned by Nymex Holdings Inc., they haven’t been subject to the same CFTC reporting requirements as Nymex trading.

ICE will now provide daily information on large trader positions in its oil-futures markets, divulge more details on market participants and notify the CFTC when traders exceed position limits.

“The next important step for us is to slice and dice and beat up the data to see what it means,” said Mr. Chilton.

“We’re in extraordinary times,” said ICE Chief Executive Jeffery Sprecher. “When credible people are saying oil could go to $200 [a barrel], it’s important that people recognize it’s not the venue, it’s the market dynamics.” He said regulators should look at more data so they are comfortable that speculators aren’t “artificially supporting the market.”

–Aaron Lucchetti contributed to this article.

Write to Gregory Meyer at [email protected] and its sister non-profit websites,,,,,, and are owned by John Donovan. There is also a Wikipedia feature.

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