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CFTC Plans Position Limits for Energy, Other Commodities

In an attempt to decrease excessive speculation, US commodities regulators aim to introduce large trading limits on oil, natural gas and possibly other commodities.

The US Commodity Futures Trading Commission will hold public hearings this summer to discuss implementing position limits for those commodities of finite supply. Additionally, the CTFCplan to consider whether or not index traders, swap dealers, and exchange-traded fund managers should be permitted to avoid these commodity limits through hedge exemptions. Some legislators believe that only people who want to buy a commodity, rather than those who avoid financial risk, should qualify for hedge exemptions.

"There is support now at the CFTC for going ahead and trying to reach the right balance to ensure that we don't go too far and prohibit trading when it's needed," CFTC Commissioner Burt Chilton said.

Watch Chilton's complete comments in the video below

"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," CFTC Chairman Gary Gensler said.

The hearings will happen this July and August and will help determine how to continue with the commodity limits.

CFTC's current policy places limits of some agricultural products and permits the exchanges to impose limits on other resources such as energy in metal. While this policy protects against manipulation, it may not protect against excessive speculation.

The CFTC also plans to add in its weekly large trader report data about swap dealers, hedge funds, contracts that help establish market prices and foreign contracts connected to US futures contracts. The current presentation of the reports only groups big traders as speculators or hedgers, impeding the public's ability to understand the marketplace.

RELATED LINKS:

  • Limits on Energy Futures to be Aired
  • Excessive Speculation In Markets Target of CFTC
  • CFTC Considering Tighter Controls on Commodity Trading

It is possible that many long derivative dealers claim to be hedgers despite the fact that their trading policies involve price risk management and speculation.

Last summer, oil and agricultural products reached record highs. Some legislators reprehended the CFTC for neglecting to act, arguing that price increases occurred in part due to excessive speculation by index traders and swap dealers. Under the Bush administration, the CFTC released two reports claiming it had no actual proof that excessive speculation resulted in the record-setting prices.

"The different regulatory approach to position limits for agriculture and other physical commodities deserves a thoughtful review," Gensler said. The CFTC will review how to impose position limits justly to all market participants.

Price Changes in Heating Oil and Coal

Change from 2007 Low to 2008 High
Change from 2009 Low to High
Crude Oil 188% 144%
Natural Gas 152% 37%
RBOB Gasoline 163% 94%
Heating Oil 179% 64%
Coal 262% 19%

John Licata, Blue Phoenix Chief Investment Strategist, agrees that oil prices will be less volatile if the proposal is approved and it should have happened months ago. According to Licata, speculators are still necessary to the market, as long as speculation is restricted within reason. Many small brokers, however, have already been negatively impacted by the change to the electronic trader, resulting in the departure of many floor traders on the NYMEX from the business.

Licata also says that ideally, it would be great to have contract volumes released on a daily basis to give more clarity on the price moves in the market.

Reuters contributed to this report.

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