July 14, 2009 / 10:31 PM / 10 years ago

CFTC limits may cut U.S. oil trading sharply

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.

NYMEX rules allow traders to hold 10,000 net futures per month and a total of 20,000 for all months. But exemptions mean a bank or fund has sometimes held more than 300,000 contracts.

That’s more than a third of the average 900,000 energy contracts traded daily on NYMEX.

Exchange-traded funds have joined big banks as behemoths in energy trading. The United States Oil Fund (USO.P), accounted for up to a quarter of bets taken on one month’s West Texas Intermediate crude futures earlier this year.

(To view a graph showing USO's NYMEX oil contracts, click: here )

A sister fund, United States Natural Gas Fund (UNG.P), held a combined 400,000 contracts on NYMEX and ICE as of July 10. The holdings totaled $4.8 billion. As passive-long funds, USO and UNG allow investors to bet on rising oil and gas prices.

“Excessive speculation gives the impression that real demand in the market is far more than it is,” said Greenberger, the law professor and former CFTC official.

Banks and funds — not producers or consumers — held most contracts last July when oil prices surged to a record high above $147 a barrel.

A CFTC inquiry last year, before President Barack Obama took office, did not fault speculators for volatility in oil prices. Upcoming hearings could revisit their role.

After July’s record prices, U.S. oil futures receded more than 75 percent to $35 a barrel in December, and later rebounded to $73.88 last month. Traders say Gensler’s regulatory warnings helped push oil below $60 again last week.

Gensler, 51, may seem an unlikely enforcer. As a high-ranking Treasury official in 2000, he helped create a Commodity Futures Modernization Act exempting energy and other derivatives from regulation.

Additional reporting by Rebekah Kebede; Editing by Jeffrey Jones and David Gregorio

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