CFTC Answers Raise More Questions
June 16, 2008
03:24 PM
Here’s a headline from today that should sound familiar: “Oil hits record near $140”.
Gasoline prices also rose to a new high -- $4.08 a gallon.
Since the start of this year, oil prices have climbed about 40 percent. And prices at the pump are directly linked to the price or oil. Over this same time period, the fundamentals of oil supply and demand have shifted far less dramatically, causing concern in Congress that the market has been pushed higher by a wave of excessive speculation and possible market manipulation. Reuters reported today, “It is very hard to prove to what extent the price is driven by speculators because there is a lack of data on who is buying oil and other commodities.”
Last month Chairman Bingaman asked the head of the Commodity Futures Trading Commission (CFTC) -- the Federal “cop on the beat” with respect to these markets – specific questions about the adequacy of its regulatory oversight. Bingaman urged the Commission to dig deeper into what’s really going on in energy markets, pointing out that the CFTC does not collect data on or analyze the fastest growing segment of energy commodity trading, lumps speculators together with more traditional energy market participants in its analyses, and has much lower transparency requirements for energy compared to agricultural commodities.
Among the notable items in the letter’s 14-pages:
ü Speculators account for nearly 70 percent of the open interest in the West Texas Intermediate (WTI) crude futures market when swaps dealers — notably, large financial firms — are counted alongside other “non-commercial” participants such as hedge funds. Even 70 percent may represent a low-ball figure, however, as it’s based only on open interest for the New York Mercantile Exchange (NYMEX) WTI contract. The CFTC was unable to provide equivalent data for the WTI futures contract traded on the ICE Futures Europe platform.
ü Since 2006, almost twice as many “hedging exemptions” from NYMEX crude oil position limits have been granted to swaps dealers than to bona fide hedgers. Meanwhile, the Commission failed to provide any clarity on the extent to which market participants granted such exemptions hold additional positions in the ICE Futures Europe WTI contract.
ü To date, the CFTC has based its economic analysis of the role of speculation in energy prices solely on data related to the NYMEX WTI crude oil contract—ignoring an estimated 25 percent of the WTI futures market. Likewise, the Commission does not include data relevant to the ICE Futures Europe WTI crude contract in its weekly “Commitment of Traders” report. In fact, the Commission believes including such data in its weekly report would be inconsistent with its current arrangement with British authorities.
In summary, the CFTC’s answers — and in some cases, lack thereof — underscore the need for more transparency in energy markets across the board. Legislation introduced last week by Senators Durbin (S. 3130), Levin (S.3129) and others, and cosponsored by Chairman Bingaman, represent an excellent starting point to achieve just that.
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