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Speculation Affects Oil Prices but New CFTC Limits May Not Stop It, Survey Finds

Almost three-quarters of top oil industry participants surveyed by Reuters feel that financial speculation contributes to oil price volatility, but many of them think new regulations to curb speculation may not be effective.

Some 73% of the 40 oil industry participants, including analysts and traders, said that speculation results in higher oil prices and was partly responsible for crude prices rocketing to $150 a barrel in 2008.

The question of whether supply and demand alone are the main determinants of oil prices has been debated in the wake of the 2008 increase. In the Reuters survey, participants estimated that speculation added $10 to $30 a barrel to oil prices, leading the news agency to calculate that even on the basis of the lower estimate speculation was costing $300 billion a year.

The Commodity Futures Trading Commission, which is responsible for regulating energy futures, said at the time that fundamentals were driving the market, but the new CFTC chairman, Gary Gensler, has said that it’s clear speculation plays some role.

He has proposed position limits on energy trades as a way of curbing that speculation. But nearly a quarter of those surveyed by Reuters said the limits do not go far enough, and 35% worried that they might do more harm than good.

Nearly two-thirds of those surveyed favored regulation, but only two-fifths thought the rules as proposed would effectively limit speculation.

Comment letters on the CFTC proposal show a similar divide, with non-financial end-users welcoming the restrictions and financial participants defending their role in creating liquidity and improving price discovery while arguing there has been no firm evidence that speculation creates any distortion in prices.

The Intercontinental Exchange, which offers over-the-counter energy contracts, noted that price spikes occurred in 2008 in commodities that have no futures markets with financial speculation. Curbing speculative activity and reducing liquidity could lead to increased price volatility and distortion of price signals, ICE asserted.

But industry users such as the Air Transport Association have argued that increased targeted investment in energy futures has driven the greater volatility in oil prices, which have been “devastating” for the aviation industry.

By. Darrell Delamaide




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