CFTC gives Congress ammo to act on speculation

By Ayesha Rascoe and Russell Blinch - Analysis

WASHINGTON (Reuters) - Does the world's leading commodity regulator know the difference between a speculator and a commercial entity?

It's a question increasingly being asked of the Commodity Futures Trading Commission as it comes under fire for a massive reclassification of a market position just as oil was surging to nearly $150 a barrel.

The new data shows market speculators hold a more commanding position than previously thought. This will spark the ire of Congress when lawmakers return in September and the push to rein in trading will now be hard to hold back.

When gasoline was surging to about $4 a gallon, some lawmakers called for action against the speculators in oil markets. But there was resistance, especially among Republicans, saying fundamentals were responsible for high prices and that speculators played a minority role.

But the landscape changed abruptly on July 18 when the CFTC quietly reclassified data on its website, transforming enormous commercial positions to that of speculator.

The CFTC said the change was made after receiving new data from a special call to select market participants. But officials did not publicly disclose what groups were involved.

Some news reports identified Vitol Group as the energy trading company affected. Vitol, which describes itself as a "major force in world energy trading," said it had not been notified of any change.

Nevertheless, the revision means that speculators controlled 48 percent of the NYMEX crude oil market as of July 15, compared with just over 38 percent previously.

"That's huge when you look at the numbers," said Phil Flynn, of Alaron Trading, shortly after the revision. "It changes the whole way you look at the recent moves in this market."

Shortly after the revision, the CFTC released its now-controversial Interim Report on Crude Oil. Despite the new data, CFTC concluded that it does not believe "speculative activity has driven changes in oil prices."

But a growing number of lawmakers think otherwise.

"I think the CFTC is losing credibility by the day," Ron Wyden, Democratic Senator from Oregon, told Reuters. "The agency's lack of oversight has hurt a lot of businesses."

Democratic Senator Byron Dorgan of North Dakota said the way the CFTC handled the reclassification "destroyed what little credibility existed. They buried that on their website, the announcement of the largest reclassification, I think, in the history of the CFTC."

At issue is not whether there are speculators in the market, as they are recognized in helping the market function as a place where commercial interests such as an oil refiners can hedge positions. The concern is whether the market was controlled by a few high rollers who distorted the daily gains in oil this year.

"The whole purpose of commodities regulation going back to the passage of the Commodity Exchange Act of 1936 was a recognition that excessive speculation in these markets can distort them and make them unusable for effective commercial hedging," said Michael Greenberger, a professor at the University of Maryland.