The Wall Street Journal (The Wall Street Journal)
- Clipping Loc. 2212-27 | Added on Friday, August 07, 2009, 08:08 AM
FTC Expands Powers on Oil-Market Probes. The FTC issued rules banning oil-market players from making misleading statements that could affect prices, giving the agency authority to levy fines of up to $1 million per violation a day. By Ian Talley
WASHINGTON -- The Federal Trade Commission issued rules expanding its regulatory power over oil-market participants, giving the agency authority to levy fines of as much as $1 million per violation a day. The FTC previously had authority to investigate oil-market manipulation under antitrust laws, but it didn't have regulatory powers to probe manipulation of markets by a single firm or individual. The new rules give the agency broad authority to prosecute manipulation of the petroleum markets. The rules, which cover both "physical" commodities as well as futures trading, ban oil-market participants from issuing "false public announcements of planned pricing or output decisions, false statistical or data reporting, and wash sales intended to disguise the actual liquidity of a market or the price of a particular product." The rules also would prohibit "material omissions from a statement that, although true, is misleading under the circumstances." The rules take effect Nov. 4. The FTC action responds to calls from Congress to intensify policing of oil markets following last summer's oil-price increases. Congress also is considering legislation designed to rein in speculative trading in oil. The move follows a recent report by the Commodity Futures Trading Commission that concluded speculation by financial investors in oil markets played a role in driving the volatility of oil prices during the past year. "This new rule will allow us to crack down on fraud and manipulation that can drive up prices at the pump," said FTC Chairman Jon Leibowitz. Sarah Lynch contributed to this article. Write to Ian Talley at email@example.com
The Wall Street Journal (The Wall Street Journal)
- Clipping Loc. 1198-1230 | Added on Wednesday, July 29, 2009, 11:45 AM
The Politics of ‘Speculation’
The oil speculators are back—that is, back in the cross-hairs of the political class. On Tuesday, Commodity Futures Trading Commission Chairman Gary Gensler uttered the Pentagon-like phrase that “every option must be on the table” to curb “excessive speculation.” If you’re wondering what makes speculation “excessive,” in Washington the answer is this: Speculation becomes excessive when prices move in a politically inconvenient direction. Which brings us to the real meaning of the three days of theater, er, hearings that Mr. Gensler is conducting this week. Last summer, as oil prices were peaking, the CFTC launched an investigation into whether $100-plus oil was the result of market manipulation by those “speculators.” That interim report, issued in July 2008, concluded that price movements were largely driven by—wait for it— supply and demand. The report noted, among other findings, that so-called speculators were net short during some of the biggest run-ups in oil prices over the past several years. In other words, they were, if anything, putting downward pressure on prices during some big spikes. The CFTC also found that markets in which futures trading is outlawed altogether—such as onions (yes, onions)—price volatility tended to be even greater than in commodities like oil with deep and efficient futures markets. Oil prices began their six-month, 80% slide about the time that report was issued. But since last December oil prices have climbed back up again, and consumer gasoline prices have climbed along with them. This is not popular with voters. Three weeks ago, British Prime Minister Gordon Brown and French President Nicolas Sarkozy warned on these pages about the dangers of “damaging speculation.” Now the U.S. is getting into the act in the form of Obama appointee Mr. Gensler—and Congress can’t be far behind. So the Gensler CFTC is now poised to issue a follow-up repudiating the commission’s earlier findings. This week’s hearings are being held without the benefit of the CFTC’s actual findings, which are due out in August—but no matter. The CFTC’s about-face is all about the politics, not the economics, of price discovery. And the real goal is not to blame the evil speculators for last year’s price spike or this year’s oil rally, but to lay the groundwork for explaining away the commodity-price bull run that we’re likely to see as a result of the Federal Reserve’s easy money and the Obama Administration’s spending and debt party. As the CFTC’s 2008 report noted, price signals drive discovery and exploration, albeit with a lag. Low prices today beget shortages tomorrow, while high prices today encourage the discovery and development of future supply. Those prices, in turn, are not the product of any economic model or forecast, but are the sum total of the bids and offers available on the spot and futures markets. In all of this, what nobody has managed to explain is what, exactly, happened to the omnipotent speculators between July and December 2008. Did they all go on vacation? Perhaps they paused for a six-month drinking binge with their winnings before returning to manipulate us anew in 2009. No, what we really have here is the age-old scapegoating that our superstitious ancestors would have recognized. The only twist in Mr. Gensler’s case is that he’s trying to scape the goats pre-emptively. On our current fiscal and monetary policy course, the dollar is not done falling and interest rates have barely begun to rise. Both of these market moves will be felt in the commodities markets, as they were after Alan Greenspan cut short-term rates to 1% in 2003-2004. So better to send the posse after the speculators now than to confront the consequences of Washington’s policy errors. There is an alternative to the market price—it’s called price controls. And the danger is that this is where we’re headed politically. If curbing speculation by limiting trader positions or restricting the ability of “non-commercial” buyers to trade is a politically acceptable way to dampen volatility (remember the onions), the logical next step is a political diktat that oil will not be bought or sold above a certain price. Truth is, we need more speculators, not less. They’re the people who can help prices find the right level, because there is no “right” level other than the one the market gives us. And that’s why, in turn, excessive speculation is nothing more—or less—than a convenient fiction for when prices don’t move the way politicians would like.
The Wall Street Journal (The Wall Street Journal)
- Clipping Loc. 3-55 | Added on Wednesday, July 29, 2009, 11:46 AM
Traders Blamed for Oil Spike By Ianthe Jeanne Dugan and Alistair MacDonald
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. 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." 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." 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. Write to Ianthe Jeanne Dugan at firstname.lastname@example.org and Alistair MacDonald at email@example.com
There has always been speculators in the market, but it wasn't until last year that it became painful evident how much these speculators could influence the market. With large funds group losing interest in the stock market they moved to the commodities market placing large buys and sells that would influence the market.
At the recent G8 meeting one of the items on the agenda was to ask internation bodies how to limit or block speculation. (CNBC) One idea that has been proposed is to limit the amount a company could invest in a commodity.
I will be adding more to this page as progress is made on this proposal.