Regulators Step Up Probes of Trading In Oil

Kurt Brouwer May 30th, 2008

Hmmm. Interesting…

Regulators Step Up Probes of Trading in Oil Markets (Wall Street Journal, May 29, 2008, Ian Talley, Ann Davis & Gregory Mayer)

U.S. regulators disclosed a broad nationwide probe into potential oil-market manipulation and said they are expanding surveillance of energy markets.

The move Thursday by the Commodity Futures Trading Commission, including its unusual announcement of an investigation in progress, comes after crude-oil prices topped $130 a barrel last week and tested all-time highs. On Thursday, light, sweet crude for July delivery settled $4.41, or 3.4%, lower at $126.62 a barrel on the New York Mercantile Exchange.

Lawmakers in Congress have been pressing regulators to crack down on manipulation, as politicians seek to demonstrate ahead of the fall elections that they are responding to soaring gasoline prices.

“It’s important that people who are paying high gas prices understand the CFTC is on the case and that we’re closely monitoring and in this instance deeply investigating any potential abuse in this important energy market,” said Bart Chilton, a CFTC commissioner.

Many economists and oil-industry executives say possible shenanigans by market traders have little or nothing to do with the high price of oil. They maintain that the rise is mainly due to fundamental factors such as rising demand, constrained supplies and the weak dollar.

Still, suspicions have lingered that speculators have helped drive oil prices higher. At a series of congressional hearings over the past month, energy consumer groups and some financial insiders have contended that large investments in commodity futures by hedge funds and pension funds are distorting prices.

It may be true — and almost certainly is true to an extent — that trading by hedge funds and others have distorted prices in oil, but that kind of trading is not illegal. It may be speculative and potentially risky, but there is nothing inherently illegal about it. But, this sounds like a full-on Federal investigation into trading irregularities, which is Fed-speak for manipulation. That is, cheating.

...The CFTC’s announcement about its oil investigation suggested a single, broad probe that began in December 2007. But people familiar with its enforcement priorities say the agency is pursuing multiple oil investigations, and that many of them relate to one another…

This story has also been picked up by other media sources:

Feds Probes Possible Oil Price Manipulation (CBS News/Associated Press, May 29, 2008)

Federal regulators are six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.

The Commodity Futures Trading Commission on Thursday said it started the probe in December and took the unusual step of publicizing it “because of today’s unprecedented market conditions.”

…the CFTC said it will immediately require monthly reports from institutional investors who manage funds designed to mimic the price of crude oil and other energy futures. The goal, the agency said, is to identify the amount of such index trading and to “ensure that this type of trading activity is not adversely impacting the price discovery process.”

The CFTC also said it has reached an agreement with its British counterpart and InterContinental Exchange Inc.’s Futures Europe to expand surveillance of energy futures contracts with U.S. delivery points, including the benchmark West Texas Intermediate crude, which trades on the New York Mercantile Exchange…

No doubt there is major pressure on regulators to make sure these markets are not being manipulated. This sounds like a response to that, particularly in the way the news of this investigation was released. It will be interesting to see how this pans out.

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