February 26, 2010 / 5:20 AM / in 8 years

Regulation must consider impact on oil mkt liquidity

* Volatility inescapable feature of markets - IEA/IEEJ

* Swings need managing, but over-regulation can hit liquidity

By Simon Webb

TOKYO, Feb 26 (Reuters) - Better operating markets and improved demand-supply data are crucial to curb wild oil price swings but further moves to regulate must factor in liquidity and the ability to manage risk, the IEA and a Japanese agency said.

As the U.S. Congress is expected to pass a regulatory reform bill this year that would include giving the top futures watchdog more clout to regulate over-the-counter (OTC) swaps, the International Energy Agency and Institute of Energy Economics Japan cautioned against any rules that could impair liquidity. [ID:nN2598658]

“Many participants highlighted that efforts to further regulate commodity markets must take into account important factors such as liquidity and the ability to manage risk, which could be impaired if incoming regulation is applied in too stringent a manner,” they said in a joint statement after a closed-door forum on factors behind oil prices in Tokyo. The meeting reconvened on Friday. [ID:nTOE61O094] [ID:nSGE61P03R]

Oversight over energy markets was one of the biggest tests to traders and regulators after oil prices CLc1 swung from a record above $147 a barrel in July 2008 to just over $32 five months later. Prices have recently hovered between $68 and $84 a barrel.

For factboxes, see [ID:nTOE61M070] [ID:nTOE61N06J]

The unprecedented volatility has led oil producers and companies to either cancel or delay projects to boost energy capacity as price instability made long-term planning difficult for multibillion dollar developments.

Speculation was blamed by some for the price swings, although others pointed to tight markets and lack of spare supply capacity among producers.

“Volatility is an inescapable feature of markets, which cannot ever be totally eradicated, nor is it desirable to try to do so,” the statement said.

“But excessive volatility can be controlled by means of better operating markets and improved visibility of current conditions and expectations for markets in the future,” it said adding improved data on demand, supply and stocks are also key to a better grasp on fundamentals, especially in Asia, which is playing an increasing role in markets.

The U.S. Commodity and Futures Trading Commission (CFTC), the main U.S. futures regulator, is moving to rein in speculation in energy trading. U.S. President Barack Obama has also proposed changes to the way investment banks trade on their own account.

After the CFTC proposed measures last month to limit the size of the bets investors could take on U.S. futures exchanges that it regulates, some expressed concern regulation could drive investors to less transparent markets such as in unregulated OTC derivatives, or drive money abroad.

“We have an entire OTC market that we don’t have jurisdiction over as CFTC, so that would be my more immediate concern,” CFTC Commissioner Scott O‘Malia told reporters at the end of the first day of the two-day forum.

In his speech at the forum, O‘Malia said that more transparency and rules for the unregulated U.S. OTC Markets -- valued at some $300 trillion -- are vital to creating a more stable financial system.

“It’s likely that a legislative reform package will pass the Congress this year,” said O‘Malia in remarks prepared for a meeting in Tokyo of the IEA, the Paris-based adviser to 28 industrialised economies, to discuss oil price volatility.

O‘Malia also emphasised the importance of improving data by developing consumers and producers in the G20, including fast growing consumers China and India, and the world’s top two producers Russia and Saudi Arabia. (Editing by Ed Lane) (Additional reporting by Osamu Tsukimori; Editing by Chikako Mogi and Ramthan Hussain)

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