U.S. oil trade surveillance won't burst "bubble"

By Richard Valdmanis - Analysis

NEW YORK (Reuters) - A move by U.S. regulators to boost surveillance of energy trading may cool speculation in the red hot market but it won't do much to pull down prices that have more than doubled in a year.

Under pressure from U.S. lawmakers blaming gung-ho speculation for the rapid inflation in oil prices that is threatening U.S. economic growth, the Commodities Futures Trading Commission said this week it was investigating oil-market trading and beefing up reporting requirements to make the market more transparent.

Energy experts said the move could spook some big investors into trimming back their positions to stay under the regulatory radar and defend against the possibility that other big investors will do the same.

"Just as traders may have been more willing to bet on prices rising higher in the belief that there was this ongoing flow of buying to drive it to new highs, now there's more of a question mark," said Tim Evans, analyst for Citi Futures Perspective in New York.

Oil prices have risen sixfold since 2002 to a record over $135 a barrel as surging demand in China and other developing economies strains global supplies, drawing in billions of dollars in cash from short-term speculators to longer-term investors like pension funds.

Money tracking commodity index funds, which give investors exposure to a basket of commodity futures, has swelled from $70 billion at the beginning of 2006 to $235 billion in mid-April, according to Lehman Brothers estimates.

Some analysts argue a steep increase in investment these indexes in recent months is responsible for the 30 percent rise in crude this year, sending prices to levels not supported by supply and demand fundamentals and creating an oil "bubble".

The CFTC said it will step up surveillance of energy trading by tracking index funds and reaching across the Atlantic to grab more information on oil contracts based on U.S. crude that are traded in Britain.

The CFTC said it reached an agreement with Britain's Financial Services Authority and ICE Futures Europe to share more information on energy contracts, including the West Texas Intermediate crude oil futures contracts that trade in both New York and London.

MANIPULATION WORRIES

The CFTC has also been investigating short-term manipulation in cash energy markets via a widely used price-reporting system run by Platts, a unit of McGraw-Hill Cos (MHP.N), according to the Wall Street Journal. ID:nL30489640

Oil prices fell more than $4 on Thursday after the CFTC's announcement, despite a big decline in U.S. crude oil inventories, leading some analysts to believe the regulator's move had already helped spark a knee-jerk sell-off.

The announcement "may be seen as potentially stemming future investment flows into energy and other commodities," said Antoine Halff, an analyst for Newedge USA.

But dealers added the effect may only serve to temper oil's climb and not reverse it.

"Some institutional long holders may get out of the long side thinking others will get out too," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. "But all in all, I don't think this will have the effect of placing a top on this market."