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Global Oil Crisis: Dangers of demonising oil futures traders

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ICE chief warns of dangers of demonising oil futures traders

By Hal Weitzman in Chicago

Published: June 23 2008 03:00 | Last updated: June 23 2008 03:00

The futures industry is not used to being the subject of popular attention. With no retail customers trading its products, it is rare that the public gets interested in futures markets.

While that might be considered a blessing most of the time, no one is more aware than Jeffrey Sprecher, chief executive of InterContinental Exchange, that it also means the general population is largely ignorant of how these complex markets function.

In recent months, as the spike in oil prices has filtered down to consumers in the shape of large increases in petrol prices, ICE has been cast by some media in the US as a menace, allowing speculators to manipulate the oil market and push up prices by trading electronically in London-based markets which are beyond the reach of US regulators.

Mr Sprecher is somewhat resigned to this role that has been cast. “We’re the messenger and people don’t like the message, which is that the global price of crude oil is on the rise,” he says.

However, he adds that he is frustrated by some of the accusations hurled at ICE. “The US press has characterised our London business as somehow being unregulated, or that the rest of the world doesn’t care about the high price of oil. That isn’t the case – our business is highly regulated.”

Nevertheless, ICE’s regulatory burden is set to increase after it bowed last week to pressure to introduce position limits for speculative traders on ICE Futures Europe, its London-based subsidiary where West Texas Intermediate crude oil futures contracts are traded. Those traders will now be subject to the same restrictions as their counterparts trading the WTI contracts on Nymex, the New York derivatives exchange.

“ICE has essentially indicated a willingness to be dually regulated by UK and US authorities,” he says. “Our alternative would be to pull our screens out of the US and just operate in the other 54 countries where we do business.”

That threat is intended to head off proposals in Washington to close the “London loophole” (as the perception of US regulators being kept in the dark about oil trades done in the London market has become known) completely. If these became law, Mr Sprecher warns, traders would escape through the London loophole beyond the reach of US regulators.

“At some point, some of the extreme proposals in the Congress would drive the business out of the US,” he says. “There’s no question in my mind that the capital flows and the trading behaviour will move quickly offshore – most likely to London – if the US allows it to.

“It wasn’t long ago that there were concerns about Wall Street moving offshore and that debate seems to have been forgotten in this oil crisis,” he says. “London is really a natural home for trading oil – it has the time-zone advantage, many of the companies that trade oil are European, and the Middle East is very comfortable with UK law and standards.”

Mr Sprecher points out that the price of oil futures is not set on ICE Futures Europe, but on Nymex. “Our contract is a derivative of WTI, so you get the Nymex price and every day we mark to market using Nymex’s price. So you can buy as much of our contract as you want, it doesn’t affect the price of oil. It’s like betting on a basketball game – whether we bet a dollar or $1,000, it doesn’t affect the outcome.”

He maintains that the threat from speculators is largely imagined. “We’ve had a lot of hearings on Capitol Hill and a lot of testimony from oil companies, consumers of energy, exchanges, professors,” he says.

“Nobody has called a speculator to the stand because I’m not sure anybody knows who this is. It’s been easier to point to this person than to actually find them and the data that show they’re driving the prices.”

“We don’t see speculators driving the price of oil. We see traditional users and consumers of energy products trading. When credible analysts put predictions out there of $200 a barrel, if you’re running a business that is going to be subject to that price increase you tend to go hedge,” he says.

“Buying oil at $130 or $140 looks reasonable if you think it’s going to $200. A lot of what we’ve seen is increased use of hedging as a proportion of the overall market.”

Mr Sprecher notes that the oil futures market is a truly global business, priced in dollars and in which much of the non-commercial trading is by algorithmic traders who are highly mobile. Other US-based traders, he points out, work for global organisations that could easily transfer them out of the US.

“People on Capitol Hill are used to hearing the threat that something may go offshore,” he says. “But in this case the market is already established offshore and it’s dominant outside the US. This isn’t an idle threat.”

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