Speculators Did Not Raise Oil Prices, Regulator Says

By Steven Mufson
Washington Post Staff Writer
Friday, September 12, 2008

A federal regulator said yesterday that market speculators probably were not responsible for recent increases in the price of oil, contrary to the assertions of some experts and members of Congress.

Walter Lukken, acting chairman of the Commodity Futures Trading Commission, said in congressional testimony that commodity index traders and swap dealers, who trade on behalf of others, reduced their activity in the crude oil market during the first six months of the year.

Although the value of oil contracts on U.S. markets soared, Lukken said that was because prices surged. At the same time, the number of contracts held by investors who expected prices to increase -- known as net long positions -- fell 11 percent from Dec. 31 to June 30. Overall, investors in commodity indexes accounted for 13 percent of New York Mercantile Exchange crude oil trading, he said.

Lukken's testimony before the House Agriculture Committee flew in the face of assertions by members of Congress and many oil experts who blame "speculators" -- a combination of pension funds, financial firms, hedge funds and others buying commodities as investments rather than for commercial use -- for much of the spike in commodities prices earlier this year.

A report released Wednesday by Michael W. Masters of hedge fund Masters Capital Management said financial speculators drove up oil prices and then, after prices peaked July 11, "began a mass stampede for the exits." They pulled about $39 billion out of crude oil markets, Masters said, leading to a sell-off of 127 million barrels of oil futures.

The CFTC study did not discuss July trading.

"By not properly policing the oil markets, the CFTC is turning a blind eye to artificial volatility," said Sen. Maria Cantwell (D-Wash.). "They may be the only group in America that believes all is well in the oil markets."

Lukken, however, said that "as the prices were going up extremely fast in oil . . ., [the number of] positions went down." He said one reason might have been that high prices pushed some funds' holdings beyond internal limits and forced sales to rebalance portfolios.

Overall, the value of commodity index fund investments in New York Mercantile Exchange crude grew 30 percent, to $51 billion, in the first six months of the year, Lukken said, but prices jumped 46 percent.

The CFTC looked at trades made on regulated exchanges, like the New York Mercantile Exchange, as well as unregulated markets, like the over-the-counter exchange. Lukken said a snapshot of trading on June 30 revealed that 18 financial traders appeared to hold aggregate positions that would have exceeded speculative limits had they all been on regulated exchanges. He said traders exceeded those thresholds on 35 occasions, including eight times in natural gas and six times in crude oil.

Lukken said these did not violate current law or regulations, but he recommended "opening the drapes" with greater disclosure about the activities of swap dealers, who are exempt from some trading limits.

One member of the CFTC, Commissioner Bart Chilton, dissented from the report, saying that "limited and unreliable data" weren't sufficient to draw conclusions. Pointing to other studies linking speculative trading and high prices, he said, "Until we have a comprehensive, unbiased study of this issue, we should not be making declarative judgments as to causation or effect."

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