CFTC Reversal on Commodities Speculation

Wall Street Journal,

Marxmail:

The Commodity Futures Trading Commission plans to issue a report next
month suggesting speculators played a significant role in driving wild
swings in oil prices--a reversal of an earlier CFTC position that
augurs intensifying scrutiny on investors.

In a contentious report last year, the main U.S. futures-market
regulator pinned oil-price swings primarily on supply and demand. But
that analysis was based on "deeply flawed data," Bart Chilton, one of
four CFTC commissioners, said in an interview Monday.

The CFTC's new review, due to be released in August, adds fuel to a
growing debate over financial investors who bet on the direction of
commodities prices by buying contracts tied to indexes. These
speculators have invested hundreds of billions of dollars in contracts
that were once dominated by producers and consumers who sought to hedge
against oil-market volatility.
(Daily change in the price of oil, in dollars per barrel)

The review also reflects shifting political winds. Under Chairman Gary
Gensler, appointed by President Barack Obama, the CFTC is departing from
the more hands-off approach it took under its previous head, a George W.
Bush appointee. The agency is widely expected to adopt new rules to
limit the amount of investments in commodities by big institutions
betting on their direction purely for financial gain.

The agency didn't make available preliminary figures from the report and
declined to discuss the previous data.

Speculators have been a lightning rod of criticism from politicians
world-wide, who worry that rising oil prices could damp the recovery
potential of their recession-hit economies. Many lawmakers and
regulators say they want to ensure that speculators don't make it more
costly for consumers to access heating oil, food and other essentials.

These decision makers don't present a united front. The U.K.'s Financial
Services Authority has found no evidence that speculators are behind big
oil-price swings, people familiar with the matter said Friday. This
view, made by the overseer of one of the world's biggest financial
markets, contrasts with an opinion piece published in The Wall Street
Journal two weeks ago, by French President Nicolas Sarkozy and U.K.
Prime Minister Gordon Brown, who said governments need to act to curb
"dangerously volatile" oil prices.

In the U.S., the CFTC begins public hearings Tuesday to determine
whether to limit speculative investments in commodities. Congress also
is weighing whether to give the CFTC the authority, under a broader
proposal to revamp financial regulation, to regulate commodities
investments that occur off traditional exchanges. Byron Dorgan, a North
Dakota Democrat, has called on the CFTC to curb "oil speculators looking
for a quick buck at the expense of American consumers."

The debate over speculators underscores the shifting nature of
commodities trading in recent years. Before the mid-1990s, these markets
were dominated by entities that had physical dealings with the
underlying commodity, and "speculators" who often took the opposite
position, providing liquidity to markets.

But a new group of investors has emerged in recent years. Those who want
to bet on commodities prices have increasingly put their money in
indexes that track the value of futures contracts, in which investors
promise to pay a certain amount in the future for oil and other
commodities. As of July 2008, financial investors had about $300 billion
riding on these indexes, roughly four times the level in January 2006,
according to the International Energy Agency, a Paris-based watchdog.

Separately, these investors may buy derivatives, not directly traded on
futures exchanges, that let them make contrary bets to offset their risks.

Crude-oil prices surged in July 2008 to a record $145 a barrel, then
dropped to about $33 in December. Oil now trades at around $68 a barrel.

Proponents of index speculation say these parties have added liquidity
to markets. They blame price gyrations on supply and demand and say
attempts to regulate speculation are foolhardy and could drive investors
to less-regulated venues.

CME Group, the world's largest commodities exchange, said in a statement
that it hasn't seen "any empirical evidence that index funds and
speculators distort prices, as has been widely alleged."
[Crude Measures]

The exchange's chief executive, Craig Donohue, said: "We are deeply
concerned that inappropriate regulation of these markets will cause
market participants to move to dark pools and other unregulated markets,
causing irrevocable harm to the entire U.S. economy." Dark pools are
private markets where large orders are transacted.

Last year, CFTC Chief Economist Jeffrey Harris told a House Agriculture
subcommittee: "The economic data shows that overall commodity price
levels, including agriculture commodity and energy futures prices, are
being driven by powerful fundamental economic forces and the laws of
supply and demand." Mr. Harris didn't return a call to comment.

The acting CFTC chairman at the time, Bush-appointee Walter Lukken, told
the House Agriculture committee that CFTC's economists "did not find
direct evidence that speculation was driving up prices." Mr. Lukken, now
an executive at the New York Stock Exchange, declined to comment.

In preparing its 2008 report, the CFTC sought information from swaps
dealers about their off-exchange derivatives transactions. CFTC
commissioner Mr. Chilton -- who was appointed by Mr. Bush and now awaits
confirmation of his reappointment under Mr. Obama -- said the data the
agency gathered was incomplete, with some players providing partial or
no information.

Mr. Chilton dissented from the 2008 CFTC report, saying the agency's
conclusions didn't go far enough. He expressed doubt about the amount
and type of data received, which he called limited and unreliable. "We
didn't have all the information we should have," he said. "And we gave
it to Congress anyway, and we spun it."
[U.S. supply of crude oil]

The agency began shifting under Mr. Gensler, its new chairman. During
his confirmation process earlier this year, Mr. Gensler said he believed
speculation was partly behind the surge in commodity prices.

Mr. Chilton said the new report will contain a more-thorough analysis of
the investors in contracts tied to oil and other commodities, and reveal
cases in which single traders hold massive market positions. "We now
have multiple sources, and confidence from different sources," he says.
He said he believes the data on trading outside exchanges is also more
reliable.

Meantime, the U.K.'s FSA has been examining whether speculation has
driven big oil price swings in recent months. The FSA is leaning toward
the conclusion that the moves have more to do with uncertainty over the
direction of economic growth than speculation, according to the people
familiar with the matter.

The FSA has no jurisdiction over U.S. markets. But it oversees ICE
Futures Europe, one of the largest global energy exchanges, which is
based in London.

The FSA doesn't believe that limiting the size of trading positions
would be "beneficial" for the market. Still, it concedes it doesn't have
a "full explanation" as to why it the market has moved as it has.
Carolyn Cui and Kara Scannell contributed to this article.