Key regulator: Speculators swamping oil, grain markets

Kevin G. Hall | McClatchy Newspapers – July 9, 2011

WASHINGTON — In the sharpest criticism yet of excessive speculation in oil markets, the head of a key regulatory agency presented data Thursday showing that almost nine in 10 traders betting that oil prices would rise were financial speculators, not actual end-users of oil.

Commodity Futures Trading Commission Chairman Gary Gensler vowed during a New York speech that his agency soon will act “to guard against the burdens of excessive speculation.”

He also said the CFTC will publish historical data later this month to show who’s betting on oil prices. Those bets drive up the contract price of oil and are partly responsible for current high oil and gasoline prices.

Futures markets allow airlines that buy jet fuel or cereal makers that buy grain to hedge against the risk of changing prices by purchasing contracts for future delivery at a set price. A buyer and seller come together to determine a fair market value. But a growing number of experts now warn that excessive speculation in these markets has driven up prices to the speculators’ profit and to the punishment of the public.

New data seem to confirm the trend. Gensler cited May 31 data that show end-users accounted for just 12 percent of the “long” positions in futures contracts for benchmark West Texas Intermediate crude oil. Long positions are bets that prices will rise in the future. That means that 88 percent of bets on price hikes for oil were held by financial players_ mainly Wall Street banks and hedge funds that invest for the ultra wealthy — not interests seeking to use the oil.

The trend was the same for wheat futures traded on the Chicago Board of Trade, Gensler said; there end-users represented just 10 percent of trades betting that prices would keep rising months out — or “long” positions. Wheat prices, like oil, have soared this year.

This May 31 data suggests that huge inflows of speculative money create a self-fulfilling prophecy that drives up commodity prices.

CFTC data also show that up to 80 percent of trading in key futures markets is either day trades or trading around the expiration of contracts, Gensler said.

“This means that only about 20 percent or less of the trading is done by traders who bring a longer-term perspective to the market on the price of the commodity,” the CFTC chairman said. “We plan to publish historical data on directional position changes later this month on our website to enhance market transparency.”

Gensler said a top priority is finalizing a rule to establish so-called position limits_ caps on how much of the market any one trader can capture — “a tool to curb or prevent excessive speculation that may burden interstate commerce,” Gensler said.

Up until 2001, financial speculators faced caps on how much they could buy in futures markets. Those caps disappeared in 2001. A McClatchy investigation last month showed that participation ratios have flipped since then, with speculators now accounting for more than 70 percent of the oil futures market. On Thursday, Gensler said that number is up to 88 percent.

Gensler said that last year’s Dodd-Frank Act gave the CFTC new authority to policy financial manipulation of commodity markets. “We will use the tools to be a more effective cop on the beat, to promote market integrity and to protect market participants,” he vowed.

“It is essential to complete the task of implementing the aggregate position limits regime, congressionally mandated to guard against the burdens of excessive speculation,” Gensler said.

Gensler warned that Republicans in Congress have tried to slash CFTC funding in a bid to thwart its new regulatory powers, and Wall Street firms are furiously lobbying to delay new rules.

Gensler said that the CFTC’s mandate has been expanded seven-fold, and it needs more resources, not less, to do its job. “If the agency’s funding does not grow — or worse, gets cut — we would be unable to enforce new rules” to protect the public, he said.

In a Tuesday investment note, analysts at Wall Street research firm Oppenheimer & Co. said the OPEC oil cartel has put a number on how much speculators may be adding to the price of a barrel of oil.

“OPEC believes the current oil prices reflect $15-20 (per barrel) of risk premium attributed to financial speculation, which may be conservative,” the Oppenheimer report said. Oil currently trades at about $100 a barrel. “Barring a severe economic recession, we believe oil prices will remain inflated unless oil speculation is effectively regulated.”

Another McClatchy investigative report in May, based on secret State Department cables obtained by WikiLeaks, showed how Saudi producers told the Bush administration they’d grant Washington’s request to pump more oil in 2008 as prices hit record levels even though they lacked customers for the oil they already were pumping. Oil prices were soaring because of unbridled financial speculation, the Saudis insisted.

Not everyone blames speculators. Federal Reserve Chairman Ben Bernanke used a Tuesday speech in Atlanta to insist that global demand for oil is outstripping supply and brings oil price volatility. Similarly, he said, droughts and production shortfalls have resulted in demand outstripping supply in many grains markets.