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Oil Speculation Draws Scrutiny

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Oil Speculation Draws Scrutiny

House Panel Told 
Curbs on Trading 
Could Ease Prices
June 24, 2008; Page A3

WASHINGTON — Lawmakers eager to curb speculation in oil markets got support Monday from witnesses who told a House subcommittee that oil prices could fall sharply if Congress put strict limits on trading in energy futures by investment banks, pension funds and other financial investors.

Associated Press
A panel of witnesses are sworn in to testify on Capitol Hill on Monday.

But officials of the Commodity Futures Trading Commission disputed the findings of a Congressional study that concluded 70% of trading in certain key oil futures contracts is now speculative. And leaders of the world’s two leading oil exchanges, the New York Mercantile Exchange and the ICE Futures Europe, based in New York and London, respectively, argued against increasing the amount of capital investors would have to put down to buy futures contracts, saying such restrictions would drive commerce offshore.

“Speculators” in the oil futures market have become a prime target on Capitol Hill, as lawmakers look to respond to voter anxiety about soaring motor fuel prices. A hearing Monday before the House Energy and Commerce subcommittee on Oversight and Investigations highlighted fundamental disputes over the role of financial investors in the recent spike in oil prices.

Lawmakers in both the House and Senate are aggressively exploring ways to rein in what they believe is excessive speculation driving skyrocketing oil prices.

Many legislators are seeking to curtail — or, in some cases, outright ban — swaps and bilateral trading in the energy futures markets, and set limits on investments on foreign exchanges operating in the U.S.

[John Dingell]

House Energy and Commerce Committee Chairman Rep. John Dingell, (D., Mich.), said lawmakers should set firm limits on the size of energy speculators’ positions, require full disclosure of all energy trading from investment banks; and prevent pension funds from investing in commodities as they seek to diversify their holdings.

To back that view, an energy subcommittee investigating the role of speculation in energy prices heard from a panel of energy-market participants who said crude-oil prices would fall with stricter regulation, with retail gasoline that’s now over $4 a gallon following suit.

“Prices would probably drop over a reasonably short period of time back to somewhere closer to the marginal production cost of oil, to $65 to $70…and I think gas prices would reflect that in a relatively short order,” said Mike Masters, a hedge-fund manager testifying before a Congressional panel probing speculation in the energy markets.

Benchmark light, sweet crude futures on the New York Mercantile Exchange were trading Monday just below $138 a barrel.

Fadel Gheit, managing director and senior oil analyst at Oppenheimer & Co., said prices could come down to a range of $45 to $60 a barrel.

Edward Krapels, a special adviser at the consultancy Energy Security Analysis Inc., said he would expect the retreat from energy markets to be fairly fast.

“I think the amount of speculation is really substantial, [and] I don’t think it would take 30 days after the President signed the bill, it would happen more quickly than that…as soon as Congress passed it, commodity funds would withdraw their positions,” he said.

Mr. Dingell and others at the subcommittee meeting said Congress should consider forcing speculators to put up margin, or collateral, worth 50% of the value of energy futures in which they seek to trade. Today margins requirements for most traders in oil futures are often in single-digit percentages of the value of their commodity holdings.

In written testimony prepared for the hearing, the chairman of ICE Futures Europe, owned by IntercontinentialExchange Inc., rejected the idea of “artificially increasing” margin levels, saying it would “drive business either to futures markets in other jurisdictions where there are no such constraints, or to off-exchange [over-the-counter] marketplaces where clearing is not available.”

The Energy and Commerce subcommittee also Monday unveiled new data it said came from the government watchdog agency, the Commodity Futures Trading Commission, that showed speculators have increased their share of futures contracts to about 70% in April from 37% in 2000.

But the CFTC sought to counter that presentation. In a separate note, the commission said the 70% share includes both long positions, or bets on a price gain, and short positions, or bets on a fall, held by swap dealers and speculators. Swap dealers as a whole have a close to neutral position in the crude-oil markets, the CFTC said, meaning they are almost equally long and short in the marketplace.

The CFTC has traditionally said that speculators only represent around 30% of the market, but after lawmakers asked the agency to reclassify swaps dealers as speculators, and not commercial hedgers such as airlines, the ratio dramatically flips.

Acting CFTC Chairman Walter Lukken said a large portion of those swaps deals would be for commercial businesses looking to hedge fuel costs. “Morgan Stanley manages all of United Airlines’ risk,” Mr. Lukken told reporters on the sidelines of the subcommittee hearing. The acting chairman said that the CFTC’s old data showed that speculation wasn’t pushing prices up, “But I think what would be admitted is that our data could be improved.”

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