Data Raise Questions on Role of Speculators

NEW YORK (Wall Street Journal via Dow Jones Newswires), August 15, 2008

Data emerging on players in the commodities markets show that speculators are a larger piece of the oil market than previously known, a development enlivening an already tense election-year debate about traders' influence.

Last month, the main U.S. regulator of commodities trading, the Commodity Futures Trading Commission, reclassified a large unidentified oil trader as a "noncommercial" speculator.

The move changed many analysts' perceptions of the oil market from a more diversified marketplace to one with a heavier-than-thought concentration of financial players who punt on big bets.

As a result, the number of futures and options contracts held by traders counted as speculators -- those who don't have a commercial need to mitigate the risks of energy prices in their business -- rose to 49% of all crude-oil bets outstanding on the New York Mercantile Exchange, up from 38%.

The scale of the recent revision and questions about the reliability and transparency of data in this market are feeding into efforts by Congress to impose restrictions on energy trading. Four Democratic senators on Thursday called for an internal CFTC inspector-general investigation into the timing of a July 22 release of a report led by the agency. That report concluded speculators weren't "systematically" driving oil prices. Oil prices soared until mid-July before beginning a decline.

A letter by the senators asks why the report was released before full reviews could take place of trader information the agency only asked for this summer. Also at issue is whether the report played down speculators' influence, notwithstanding the report's finding that "the positions of non-commercial traders in general, and hedge funds in particular, often move in the same direction as prices."

A CFTC spokesman declined to comment on the senators' letter. The CFTC, in response to legislators' demands, this summer has been collecting more data about the trades Wall Street firms handle for clients. It has pledged to report back to Congress by Sept. 15.

Meanwhile, a debate is erupting within the agency, which is charged with overseeing the $4.78 trillion commodity futures and options markets, about what the agency does and does not know about participants in this market. The CFTC has been accused by some in Congress this year of lax oversight.

Bart Chilton, a Democratic CFTC commissioner, says the data reclassification "highlights that we need to ensure that we have our data sets not only complete but exhaustively understood.

It also shows again we don't have all the information that we need to make declarative statements about the role of speculators in commodity markets. I'm disappointed that the agency released interim study results about the impact of speculators on oil markets when we don't have all the data."

Commodity-market players have relied on the CFTC's weekly reports about large traders, both commercial and speculative, to read trends in the market as they make investing decisions. But as speculative activity has risen, criticism of the data has, too.

Lehman Brothers analysts say the CFTC data, as they are now reported, fail to distinguish certain categories of financial traders from commercial traders and create "an opportunity for the activity of less-informed, purely financial investors to distort expectations."

In recent months, legislators in Congress have demanded insight about the distinction as they try to answer concerns of constituents, from companies to consumers, about what has contributed to the high price of gasoline and other fuels. In response, the CFTC has been collecting more data. It has pledged to report back to Congress by Sept. 15.

The array of opinions about how speculation is affecting energy prices comes about in part because of the tricky task of determining what, exactly, is pure speculation and what is so-called commercial trading, in which companies hedge risks involved with using, selling, or processing physical commodities in their everyday businesses.

Many Wall Street investment banks, private-equity firms and hedge funds have invested in physical assets such as storage terminals, pipeline and distribution companies, power plants and oil and gas properties.

That dual role potentially puts them in the position of being both hedgers and speculators. This is an issue in last month's bankruptcy filing of energy-distribution-and-storage company SemGroup LP. Creditors have alleged that it put more capital at risk through speculation than it needed to in order to hedge risks in its commercial operations. A company spokesman declined to comment.

For most of June and early July, oil prices zoomed upward, hitting a record $145.29 a barrel on the New York Mercantile Exchange on July 3. But they have since tumbled 21%. Thursday, oil settled at $115.01 a barrel, down 99 cents, or 0.9%.

The CFTC is a few weeks into sorting a massive amount of data requested in June from Wall Street firms, and it is requesting additional data.

The firms providing the data are so-called swaps dealers. They sell clients energy derivatives that allow clients to bet on energy prices away from the futures exchanges, and the banks frequently offset the risk of these client transactions by trading on the futures markets.

Thomas LaSala, a Nymex regulatory official, said that the CFTC's reclassification didn't affect any trading levels Nymex imposed on particular traders and that his exchange had not forced the entity to unwind positions.

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