CFTC limits may cut U.S. oil trading sharply

By Joshua Schneyer and Barani Krishnan - Analysis

NEW YORK (Reuters) - Fewer than one out of every 10 barrels of oil traded on U.S. futures exchanges gets delivered to consumers, an equation that may change under sweeping new restrictions being weighed by the government's top commodities regulator.

With plans to curb speculation in energy trading, U.S. Commodity Futures Trading Commission Chairman Gary Gensler could push banks and funds, which now buy and sell the lion's share of oil and gas contracts, to seek opportunities elsewhere, industry watchers say.

Gensler pledged last week to seek federal limits on the number of contracts that traders are allowed to hold.

"Gensler is going to make these markets a lot more transparent, and unattractive for people who are in them just for speculative purposes," said Michael Greenberger, a University of Maryland law professor and former CFTC director.

CFTC data obtained by Reuters show noncommercial players -- often regarded as speculators -- accounted for 71 percent of buying in benchmark oil contracts on the New York Mercantile Exchange, the world's largest for energy trading, as of April 2008. That was up sharply from a 34 percent share eight year ago.

NYMEX -- and other U.S. exchanges where energy derivatives are traded -- set their own position limits. But traders are often exempted, and some have accumulated massive positions.

The federal position limits pursued by CFTC may just curb noncommercial traders from having such big holdings in energy.

Gensler has called for hearings this month on his plan, and restrictions may be put into place by October, CFTC commissioner Bart Chilton told Reuters on Friday.

Tighter regulations could send energy traders to unregulated foreign markets where prices and credit risk elude oversight. It could also deprive U.S. commodity exchanges of billions of dollars of inflows.

Shares in CME (CME.O), the parent of NYMEX, and the InterContinental Exchange (ICE.N), another U.S. exchange for energy and other commodities, plunged last week.

Analysts say the CFTC's review of exemptions granted to major investment banks like Goldman Sachs will be key to deciding whether the landscape in energy trading changes.

Goldman Sachs (GS.N), where Gensler once served as co-head of investment, is a giant in energy trading that would not like to see its role cut. The bank on Tuesday beat earnings forecasts in the second quarter and posted a record $13.8 billion revenue, helped by strong commodities results.

Goldman Sachs has portrayed its energy trading as hedging that should be exempt from any limits.

"Who is hedging and who isn't? That's the question," said Mike Fitzpatrick, vice president at MF Global in New York.

NYMEX, the largest U.S. energy derivatives exchange, has allowed at least 117 exemptions for traders since 2006, according to a spokesman at CME Group, which owns NYMEX.