Kate Mackenzie For speculators, there’s always the onion defence

Commodities speculators: most of Congress hates them, George Soros criticises them, even Opec isn’t very keen.  After numerous congressional hearings over the past few years, the CFTC is about to formally consider whether it should set limits on speculative positions, particularly in energy commodities:

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. This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.
Aggregate Position Limits and Review of Hedge Exemptions for Energy Futures Markets

The CFTC sets position limits for some agricultural products, but not energy markets – and, as the CFTC notes, exchanges protect against manipulation and congestion, but not from the ‘undue burden of excessive speculation’:

This different regulatory approach to position limits for agriculture and other physically delivered commodities deserves thoughtful review. It is incumbent upon the CFTC to
ensure a fair and transparent price discovery process for all commodities. The Commission will be seeking views on applying position limits consistently across all markets and participants, including index traders and managers of Exchange Traded Funds (ETFs); whether such limits would enhance market integrity and efficiency; whether the CFTC needs additional authority to fully accomplish these goals; and, how the Commission should determine appropriate levels for each market.
While the Commodity Exchange Act provides for exemptions from such limits for “bona fide hedging transactions or positions”, the CFTC is currently reviewing the manner in which this exemption has been implemented. Recently, the Commission completed a comment period on whether the bona fide hedge exemption should continue to apply to persons using the futures markets to hedge purely financial risks rather than risks arising from the actual use of a commodity. In addition to the comments received, these hearings will further inform the rulemaking process for the Commission on this issue.

It’s been almost a year since oil prices hit a $147 high, but the continuing volatility of energy prices hasn’t let the issue go away. Note that it’s not just professional traders who are under scrutiny: the huge popularity of passive investment funds such as USO (and lately, USG) and their effect on markets, particularly on the ‘roll’ from front month to later contracts, has added another angle to the debate about the effect of all this activity on physical oil prices.

Who will defend the speculators? Well, the IEA has tended to downplay their role in big price rises. And there is always the ever-eloquent John Kemp.

But one of the main points of argument may be in the CFTC’s own point that it sets limits on agricultural commodities positions, but not energy commodities. There is always the notorious example of onion futures: volatility and prices continued to rise after trading in them was regulated in the late 1950s. As this paper shows, it didn’t appear to have helped in 1963, and it doesn’t appear to have worked more recently, either: onion prices rose four-fold from 2000 to 2008.

Related links:

CFTC prepares crackdown on speculators (FT, 07/07/09)
CFTC statement (07/07/09)
Speculation, and how high is too high for the economy? (FT Energy Source, 11/06/09)
As CFTC investigates USO’s holdings, don’t forget Cushing (FT Energy Source, 27/02/09)
Market fundamentalism versus the speculators (John Kemp/Reuters, 21/08/09)