Lawmakers look to rein in crude oil speculation

WASHINGTON (Reuters) - U.S. Democratic lawmakers on Tuesday discussed ways to limit speculation in crude oil futures, including regulation of overseas trading in a benchmark U.S. oil contract.

Sen. Maria Cantwell, a Washington Democrat, called the Commodity Futures Trading Commission a "toothless tiger." She told the Senate Commerce Committee the CFTC's actions were inadequate to rein in speculation she blamed for crude oil's surge last month to a record above $135 a barrel.

The CFTC, the top U.S. futures market regulator, last week said it will step up surveillance of energy trading by tracking index funds and getting more information on oil contracts based on American crude that are traded in the United Kingdom.

But Cantwell told a Commerce Committee hearing the CFTC should revoke a no-action letter it issued in 2007 where it declined to regulate trading of the West Texas Intermediate oil contract (WTI) on the Dubai Exchange. She said the CFTC also should regulate WTI trading on a London exchange operated by the Atlanta-based IntercontinentalExchange.

If the CFTC declines to act, Cantwell said she would pursue legislation to close the "London-Dubai Oil Loophole." CFTC officials were not present to testify at the hearing.

Overseas WTI oil trading on electronic platforms are exempt from most CFTC oversight, even though such contracts are linked to the New York Mercantile Exchange's contract, which has a delivery option in Cushing, Oklahoma.

Oil prices have doubled in the past year as big funds have poured money into commodities, seeking a hedge against inflation and the weaker dollar. The hot money has helped extend a six-year rally in oil, as supplies have failed to keep pace with surging demand in emerging economies like China.

Billionaire hedge fund manager George Soros said U.S. regulators should consider boosting margin requirements on oil trading.

"We are currently experiencing the bursting of a housing bubble and, at the same time, a rise in oil and other commodities which has some of the earmarks of a bubble," Soros said.

Sen. Byron Dorgan, a North Dakota Democrat, said "There is no free market here at all. What we have here is a speculative bubble."

Senate Majority Leader Harry Reid last month proposed legislation to prevent traders of U.S. crude oil from routing transactions through off-shore markets to evade regulation.

The bill sets forth reporting requirements, and requires the CFTC to boost margin requirements for all oil futures trades, in an attempt to put a lid on what Dorgan has called "an orgy of speculation in the energy markets."

Michael Greenberger, a professor at the University of Maryland School of Law and a former CFTC official, said it was an "outrage" that the CFTC has left it to regulators in London and Dubai to police futures markets that trade more than 30 percent of WTI crude oil volumes.

"The CFTC has abdicated its responsibility," Greenberger said. "Turning this regulation over to Dubai and the English is a joke."

(Reporting by Chris Baltimore; Editing by David Gregorio)