- The Washington Times - Wednesday, June 18, 2008

Just how much oil prices are being driven by speculation became clearer yesterday as regulators revealed that Wall Street dealers, hedge funds, pension funds and other speculators hold 70 percent of the leading oil futures contracts traded in New York.

The price on those contracts continued to defy gravity yesterday, with premium crude closing near $134 a barrel despite trends that in the past would have weighed down prices, including falling demand for oil in the United States and a strengthening U.S. dollar. Oil’s seemingly relentless rise in the face of these trends has prompted charges that speculators have taken control of the market.

The latest estimate of how large the investor involvement in the market has become was provided by the Commodity Futures Trading Commission this week to the Senate Energy and Natural Resources Committee.

The commission previously said speculators constituted only 37 percent of the market, but at the committee’s behest, the new estimate includes for the first time the 40 percent of oil futures contracts held by Wall Street dealers who have taken advantage of a regulatory loophole for “swap dealers” provided by the commission.

“Even 70 percent may represent a low-ball figure,” as it includes only trading in the most popular crude-oil contract on the New York Mercantile Exchange - the benchmark premium crude West Texas Intermediate, said Bill Wicker, spokesman for committee Democrats.

The commission said it could not provide information about investors in the same contract on a London exchange, where an estimated one-quarter of the contracts are bought and sold.

In addition, the figures exclude the huge but little understood off-exchange market for oil, which has grown rapidly as of late. That market is thought to be entirely dominated and run by big financial firms and speculators.

The market for all oil and commodity futures contracts worldwide burgeoned to $8.4 trillion in December from $7.5 trillion the previous year, according to the Bank for International Settlements.

Oil is among the fastest growing categories of investment, and took off at the end of last year just as interest in world stock markets started to languish. Investment in oil and other commodities has been spearheaded by all Wall Street firms, hedge funds and commodity index funds, which allow small investors to participate in the commodity boom.

Regulators and legislators have focused increasingly on a regulatory loophole that allows Wall Street firms such as Goldman Sachs and Morgan Stanley to pose as “commercial” rather than “financial” participants in the market because they provide hedges, a kind of insurance, for oil refineries, airlines and other companies that want to be protected against fluctuations in oil prices.

The possibility these dealers might be misusing their exemption from stricter regulations imposed on financial investors has prompted the commission to investigate and reconsider the greater latitude it has given to such firms.

In its latest move to tighten oil-market regulation, the commission yesterday took steps to curb trading in U.S. oil contracts on the London Intercontinental Exchange by imposing the same limits on positions and accountability requirements that investors must follow in New York.

Sen. Richard J. Durbin, Illinois Democrat, applauded the commission’s moves to more-closely regulate oil speculators, and said the appropriations subcommittee that he chairs will add to the agency’s budget and staff so it can more rigorously pursue possible wrongdoing in the huge and complex futures and derivatives markets for oil.

“CTFC simply doesn´t have enough cops on the beat,” he said, noting the agency can monitor only the fraction of oil trading that occurs on U.S. exchanges.

“Trading in commodity markets has exploded, from nearly 500 million trades in 2000 to over 3 billion trades in 2007,” while the commission’s staff levels dropped by 21 percent, he said.

Besides adding staff, Mr. Durbin and other senators have drafted legislation that would close the so-called “London loophole,” which allows investors who route their orders through London to escape the commission’s scrutiny.

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