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Federal Probe Focuses On Oil Price Manipulation

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The Associated Press

Published: May 30, 2008

WASHINGTON - Federal regulators are six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.

The Commodity Futures Trading Commission on Thursday said it started the probe in December and took the unusual step of publicizing it "because of today's unprecedented market conditions."

Crude prices have risen more than 42 percent since early December, even after a decline Thursday of more than $4, to $126.62 a barrel, on the New York Mercantile Exchange. Gasoline prices are nearing a national average of $4 a gallon, up from about $3.20 a year ago.

The commission said details of the investigation remain confidential, but it announced a handful of initiatives designed to increase transparency of U.S. and international energy futures markets.

For example, the commission said it will immediately require monthly reports from institutional investors who manage funds designed to mimic the price of crude oil and other energy futures. The goal, the agency said, is to identify the amount of such index trading and to "ensure that this type of trading activity is not adversely impacting the price discovery process."

The commission also said it has reached an agreement with its British counterpart and InterContinental Exchange's Futures Europe to expand surveillance of energy futures contracts with U.S. delivery points, including the benchmark West Texas Intermediate crude, which trades on the Nymex.

"The implementation of today's measures will improve oversight of the energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud," the commission said in a statement.

A Limited Effect

Analysts said the commission's action would likely have a limited effect on oil prices, which have risen on a combination of factors, including growing demand in China and other developed nations, the falling value of the dollar, geopolitical tensions and low interest rates, which have fueled a futures buying binge by institutional investors seeking to ride oil's upward momentum.

It is the last factor, exacerbated by the Federal Reserve's efforts to prop up the ailing housing market, that is playing the biggest role in the recent run-up, according to Howard Simons, a strategist at Bianco Research in Chicago.

"Eliminate that excess money, and the problem of soaring prices disappears," he said.

Still, the commission's action "will have a chilling effect" on speculative investors' enthusiasm for energy futures, Simons predicted. "What they're saying ... is, 'You either stop this or we're going to stop it for you.'"

Move Could Hurt Pension Funds

At least one energy analyst sees trouble on the horizon for pension funds and other nontraditional investors looking to commodities indexes as just another type of security they need to have in their portfolios. If a major price drop occurs, this relatively new breed of investors will all want out of energy futures at the same time, and it will be "like entering a revolving door at the wrong time in the wrong direction," according to Cameron Hanover President Peter Beutel.

Sen. Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee, this week asked the Commodity Futures Trading Commission to provide the committee with more information about its oversight of energy commodity markets.

The New Mexico Democrat said he was concerned about increasing trading activity in U.S. crude oil taking place overseas and in over-the-counter markets. He also questioned the commission's practice of classifying large investment banks as "commercial" market participants alongside traditional buyers and sellers, and its "continued assertion that noncommercial participants, or speculators, follow rather than lead oil price movements."

Bingaman on Thursday said he was pleased with the commission's steps and that a future hearing will explore how they will address his concerns "that the commission lacks a robust understanding of the oil market."

Congress this month voted to give the commission greater oversight of unregulated electronic exchanges to protect consumers and deter price distortion and manipulation.

A Senate subcommittee investigation last year found that hedge fund Amaranth Advisors LLC, which collapsed in 2006 after losing more than $6 billion in natural-gas trades, had shifted its activities to ICE from the regulated Nymex to avoid trading limits, and that the "excessive speculation" raised homeowners' heating bills.

Speculation has been cited as one of many factors contributing to surging petroleum prices, along with assumptions about new supplies, limited demand growth, possible supply disruptions overseas and the dollar's depressed value against other currencies.

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