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Regulators Say Oil Market Speculation's Effect Unclear

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The Associated Press

Published: September 12, 2008

WASHINGTON - Federal regulators said Thursday after a lengthy review that they could not determine how much speculators have influenced commodity prices, especially the run-up earlier this year in oil prices.

The Commodity Futures Trading Commission released a much-anticipated report examining the activities of large index investors and so-called "swap" traders, who trade on behalf of banks or wealthy individuals, in the commodity futures markets including crude oil.

"This preliminary survey is not able to accurately answer and quantify the amount of speculative trading occurring in the futures markets," the report said. The problem is that the available data does not differentiate between speculative and legitimate hedge trading activities, it said.

The commission staff report recommended better classification of trading activities and improved market reporting requirements for large traders. The trading commission said it may also reclassify swap dealers under a separate category in its weekly reports to keep better track of potentially speculative trading activities.

Critics have blamed record crude prices on speculators who, unlike airlines and other industries that hedge fuel costs to protect against price spikes, have no implicit link to oil.

Earlier this week several senators who want Congress to impose new measures to control oil market speculation, released a private consultants' report maintaining that speculation by large investors was a primary reason for oil prices to jump. The report said these investors poured $60 billion into oil market futures during the first five months of the year and since July have withdrawn $39 billion as oil prices fell.

The trading commission staff report produced other data that suggest that speculation may not have had such a dramatic impact.

Although oil prices rose significantly in the first half of 2008 "the activity of commodity index trades during this period reflected a net decline of swap contracts as measured in standardized futures equivalents," the report said.

Also, commodity index traders' "long" positions, which anticipated prices would continue to rise, decreased by 45,000 contracts, or about 11 percent, on the New York Mercantile Exchange during the first six months of the year, the report said.

Acting Commission Chairman Walter Lukken said he saw no clear evidence speculation had inflated oil prices.

Sen. Maria Cantwell, D-Wash., a sponsor of legislation aimed at curbing oil market speculation, said the report and Lukken's assessment reflect the commission's inability "to bring the light of day" to the unregulated oil markets.

The commission "is turning a blind eye to artificial volatility. They may be the only group in America that believes all is well in the oil markets," Cantwell said in a statement.

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