Futures & Commodities

Rein In Energy Speculation: Hedge Fund Manager

The Commodities Futures Trading Commission will seriously consider imposing strict position limits on traders placing bets on energy contracts, and that's just fine with hedge fund manager Mike Masters.

The head of Masters Capital Management blew the whistle on oil speculators last year when he testified before Congress regarding the rapid run-up in oil prices as it reached its record high of $145 a barrel. He is scheduled to testify at the CFTC hearings Aug. 5.

Masters, whose long/short equity fund manages approximately $1.06 billion according to data provider IPREO, believes stringent limits on commodities trading would work.

"For about 60 years we had position limits. In the 1990s, they were removed from a lot of commodities. Now, with crude, there are only position accountability limits three days before the contract is up. We need them again. We need to go back to that regulatory regime that worked for 60 years.

"Bottom line, the commodities market really just boils down to inventory. If you want to invest in energy, buy energy companies, exploration partnerships, or alternative energy companies — don't buy the inventory itself," he said.

More on Proposed CFTC Regulations:

To make his case, Masters makes a simple analogy: instead of investors trying to buy up all the tickets to Disneyworld (inventories to be sold by Disney) as an investment, wouldn't it make more sense that investors buy the common stock in Disney Corporation (means of production)?

In preparing for his Congressional testimony, Masters found data he said shows that markets are being primarily driven by capital markets investors versus the designated prime constituency: bona fide hedgers.

"We compiled data from the CFTC and aggregated it together which showed excessive speculation in oil markets," Masters said. "Currently, the crude oil market (when classified correctly on a reasonable pro-forma CFTC classification scheme), is approximately 80 percent or so speculative (non commercial) versus 10 years ago, when it was approximately 25 percent).  

"In fact, our commodites markets are no longer non-correlated to capital markets (which is the reason Wall Street Banks pitched them to institutional investors as an 'asset class')," he said.

To date, the NYMEX crude contract for September delivery is down about 45 percent from 52 weeks ago, settling yesterday at $67.23 a barrel. Year to date, however, it is up 50.74 percent.

"The size of these flows creates distortions in the markets," he said.

"The main thing people need to realize is that having some regulation coming out of an era of no regulation is not a bad thing. You can't get too much regulation in the commodities markets because we are starting at a place with virtually none to begin with."