US regulators are considering sweeping changes to commodities trading to stamp out the excessive speculation that has been blamed for the volatility of oil prices. While real-world businesses that need to buy oil on the global markets would be unaffected, a vast industry of financial investors and speculators could face curbs on the size of their activities.
The Commodity Futures Trading Commission says it will hold hearings in the next few weeks on whether to impose position limits on all participants in the commodities markets.
"Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products," Gary Gensler, the commission chairman, said yesterday.
Mr Gensler took office in May promising to use the full set of tools available to the CFTC to rebuild trust in financial markets, battered during the credit crisis. Even before the meltdown of the derivatives markets which are under its purview, the CFTC was facing political pressure over the surge in speculative activity in commodities markets, where the oil price soared to $147 per barrel last summer, driving petrol prices to more than $4 a gallon.
The price crashed after it became clear a recession would crimp demand.
In recent years, exchange-traded funds have offered retail investors a way to bet on the price of oil, and pension funds and other institutional investors have increased their holdings of commodities derivatives.
But market players are divided about whether such financial participants have driven up prices or even increased the volatility of the market, and the reaction of many yesterday suggested that Mr Gensler will face opposition as his consultation progresses.
Mike Fitzpatrick, vice-president of MF Global, said that "without speculators bringing liquidity to the markets, they couldn't function properly, with an even higher cost to consumers."
Jack Scoville, an analyst for The Price Group, urged the CFTC to "use caution" and judgement. "You have to remember the speculator is an important part of the market. After all, the exchange was formed by a group of merchants and speculators," he said.
Phil Flynn, an analyst at PFGBest Research in Chicago, called the whole exercise "a witch hunt", saying: "I don't think speculation was the cause of oil going to $147, nor was it the cause of it going to $37."
Currently, CFTC does not set position limits on oil and other energy contracts, although futures exchanges do in some cases. The CFTC has position limits on some agricultural contracts which are in short supply.