Oil scene: Market manipulators under fire

A worker adjusts the valve of an oil pipe at an oil refinery in Zawiya, 57km west of Tripoli. (Reuters)

By SYED RASHID HUSAIN

Published: Apr 22, 2012 23:46 Updated: Apr 22, 2012 23:46

In a curious twist of events, the US administration is gearing up to increase its vigil on oil market speculators — so as to tame the galloping gas prices.

US President Barack Obama has asked Congress for help in policing oil markets and to be on the lookout for price manipulation by speculators.

He wants Congress to strengthen federal supervision of oil markets, increase penalties for market manipulation and empower regulators to

increase the amount of money energy traders are required to put behind their transactions.

Obama says the country can’t have some speculators reap millions while consumers suffer from high gas prices.

Interestingly it is not the producers who are now alone in blaming cursing the speculators.

The world’s largest consumer also now appears on the same page. The US president is asking for six times more staff at the Commodity Futures Trading Commission to supervise the crude markets.

He also wants to raise penalties for market manipulation and give regulators the ability to require more money to back up speculative trades.

Speculation is under the hammer – one needs to concede. And this is a real turnaround – especially when seen in the perspective of that fateful Energy Summit in Jeddah, not too far back, in summer 2008.

Despite all the persuasion, nudging and prodding by Saudi Arabia and its other OPEC allies, one could recall Secretary Bodman, the then US Energy Secretary that evening, with lengthening shadows, stamping his weight, brushing aside in the process, the entire speculation argument and mincing no words in blaming almost solely the fundamentals – the lack of supply — for the price spike then.

Consumer heavyweights were not at all ready to concede any role to speculation for market volatility.

And on the other side, Minsiter Petroleum and Mineral Resources Minister Ali Al-Naimi had simple mathematics to underline his view – the role of speculation as the prime reason of market volatility.

With bond markets and equities behaving erratically, investors were encouraged to move capital into commodities like oil.

“Consider that the bond and equity markets in the US alone are valued at roughly 50 trillion dollars, and that if money managers decided to reallocate a nominal one-half-of-one percent of those assets into the oil commodity space, the resulting $250 billion influx of funds would equal the value of the entire Nymex WTI markets,” the minister then has been underlining.

The two sides were definitely miles apart. The issue was explosive and indeed divisive – then. Not anymore!

Speculation needs to be curbed – people on both side of the aisle appear now in harmony.

Under focus is the increasing role of investment in oil futures contracts by pension funds, mutual funds, hedge funds, exchange traded funds and other such funds.

Much of that money is betting; oil prices will rise, analysts underline.

There is a need to curtail the ability of speculators to take unlawful advantage of oil price volatility, they hence agree.

And this meaningful — in many respects!

Obama’s proposals, made to Congress recently would add $52 million to the budget for the Commodity Futures Trading Commission, overseeing the oil futures markets, giving it more teeth, by investing in improved technology and additional employees.

The president also proposed increasing the maximum civil and criminal penalties for manipulative activity in oil futures markets, beefing up data collection and giving the Commodity Futures Trading Commission authority to increase the amount of money that a trader must put up to back a trading position.

The administration officials said such authority could help limit disruptions in energy markets.

In addition, the Obama administration, on its own, intended increasing access to the commission’s data so the White House Council of Economic Advisers can also examine and analyze trading information.

Indeed, electoral politics, especially in an election year, seem to have played a role in crystallizing the thought process in Washington.

But if the necessity to appear doing something to push gas prices down pressed Barak Obama to look at the issue of speculation – rather closely — his adversaries too were quick to question, whether Obama was exaggerating the effect of speculation on the market.

Some analysts have been saying in recent months that speculators are a factor in the recent surge in oil prices but are not the main reason. A study last month by the

Federal Reserve Bank of St. Louis said global demand has been the main driver of higher oil prices over the last decade.

Speculation was the second-largest factor, accounting for about 15 percent of the rise, it however, pointed out.

Republicans on Capitol Hill labeled the proposed legislation a political ploy. But the president argued that the measures were necessary to prevent illegal trading as the volume of trading increases.

“Imagine if the NFL quadrupled the number of teams, but didn’t increase the number of refs,” Obama said.

“You’d end up having havoc on the field, and it would diminish the game. It wouldn’t be fair. That’s part of what’s going on in a lot of these markets.”

Obama’s expected Republican opponent, Mitt Romney, accused the president of over-regulating industries and slowing production.

“He’s made it harder through trying to push the Environmental Protection Agency into regulating fracking for natural gas and oil, made it harder to get a reliable supply of gas, made it harder for those that mine coal and for those that use coal, made it harder to drill for oil,” Romney said as he campaigned near western Pennsylvania’s coal country.

Obama proposals also drew Republican ire. Congressional Republicans have their own energy proposal, and many say they do not believe that market manipulation is the cause of the rise in gas prices. The House speaker, John A. Boehner of Ohio, is pushing for more domestic oil and natural gas exploration and for a freeze on regulations on refineries. Senator Mitch McConnell of Kentucky, the Republican leader, issued a statement saying that the “proposal by the president probably polls pretty well, but I guarantee you it won’t do a thing to lower the price of gas at the pump.”

And for a change, in Washington, the focus has shifted away from mere fundamentals.

Speculation, and not the OPEC, is the whipping bag today. And irrespective of the outcome of the ongoing debate in Capitol Hill, one thing remains certain — speculation has been accepted by all as a factor – contributing to the spike in crude prices today. The issue that still remains to be sorted out is — to what extent?

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