WASHINGTON The Commodity Futures Trading Commission's proposal to apply position limits to oil and natural gas futures markets faced a wave of resistance from major energy market traders and investors, who decried it as a misguided effort that would drive away liquidity.
But as a public comment period ends on Monday, the arguments against the energy position limit plan by the top futures regulator may be eclipsed by the political momentum for a clampdown on banks, widely perceived as sapping money from Main Street using little understood derivatives.
The shifting political dynamic makes it more likely that CFTC Chairman Gary Gensler gets the support he needs from fellow commissioners -- some of them wary -- to make good on his pledge to prevent excessive speculation in energy markets.
"I think really the world has turned substantially in the last four weeks," said Michael Greenberger, a law professor at the University of Maryland and a former CFTC official.
The American Petroleum Institute (API), which represents nearly 400 upstream and downstream oil and gas companies, on Monday was the first major industry body to issue its own concerns, following similar objections from the global swaps organization and major exchange-trading fund providers.
While retail and corporate end-users, including the U.S. airlines body and the world's second-largest shipping firm, have written in support of the measures, the financial community has stood in fierce opposition, often arguing that the measures could in fact worsen volatility by driving trade overseas.
"This would serve to decrease transparency in the marketplace," the API said, arguing that the proposed limits would hurt its members' ability to hedge.
While Gensler may choose to wait until Congress passes financial regulatory reforms that are at the top of Washington's agenda -- reforms that include substantial new powers for the CFTC over the currently unregulated swaps market -- analysts say it's unlikely that the proposal will be shelved, or substantially altered.
"I can't really see him, given who he is, just letting it lay fallow," said Geoffrey Aronow, partner with the law firm of Bingham McCutchen and a former CFTC enforcement director.
The CFTC has not said how quickly it will make a formal decision after the end of the required 90-day comment period.
LEGACY OF $147 OIL
The position limit proposal stems from the spike in oil futures prices to a record of more than $147 a barrel in 2008. Even though CFTC economists said the surge was due to supply and demand, many people blame an influx of hot money from funds and other financial investors.
The proposals aim to limit investment positions of big traders to prevent them from having too much influence on the market. Large players would be required to exit speculative trading positions in certain circumstances, which could be a big blow to major oil companies such as BP Plc and derivatives dealers such as JPMorgan Chase & Co.
"If prices are being controlled by basically Wall Street, I don't think that is how it should be handled," said Kurt Denker, an insurance claims adjuster in Harlingen, Texas, near the border with Mexico.
Denker, who sometimes spends more than $800 a month on fuel, was one of thousands of Americans who emailed form letters to the CFTC supporting the plan for limits.
"I use a lot of fuel in one month's time and it does affect my pocketbook tremendously," Denker told Reuters.
Lawmakers, pressured by their constituents, urged the CFTC to do more to tamp down speculation, a challenge accepted by Gensler when he became the top futures cop almost a year ago.
The agency proposed the limits in January. Players initially dismissed them as too high to matter, but became more worried when they examined the details.
The proposal "is unduly onerous, will significantly limit the usefulness of the U.S. futures markets to international traders, and is premature in light of pending congressional legislation," said Hans Ephraimson, the CEO of DB Commodity Services, a unit of Deutsche Bank <DBKGn.
In January, three of five CFTC commissioners expressed similar worries that the limits could drive trade away from U.S. futures markets.
But Congress has since moved at a blistering pace to overhaul the country's tattered financial regulatory framework, and seems likely to give the CFTC oversight of the unregulated derivatives market, including a mandate to set position limits there, too.
That's likely to address the concerns of Democratic Commissioner Michael Dunn -- if not also the two Republicans serving on the CFTC.
"It might make quite a bit of difference if reform legislation goes through," said former CFTC Chairman Philip McBride Johnson, now with the law firm Skadden, Arps, Slate, Meagher & Flom.