Speculators back in Obama’s sights

Beating an old drum

President Obama announcing his proposal (Source: Bloomberg) President Obama announcing his proposal (Source: Bloomberg)

Speculators are back in the political crosshairs. President Barack Obama today asked Congress to spend an additional $52 million to bolster the government’s ability to supervise the oil market. He proposed larger penalties for market manipulation and giving the Commodity Futures Trading Commission (CFTC) the ability to increase contract margins.

“We’re tackling issues of supply and demand, even as we’re looking at the long term, in terms of how we can structurally make ourselves less reliant on foreign oil,” Obama said in a statement from the Rose Garden. “We still need to work extra hard to protect consumers from factors that should not affect the price of a barrel of oil.”

The plan would give regulators the ability to increase margin requirements, something exchanges currently set. CME Group took issue with this in a statement released following the speech. “The Administration’s proposal to use margin requirements to control cash prices is misplaced. The Administration must recognize that exchanges, as the operators of regulated energy markets, are in the best position to monitor volatility and manage margin requirements. Margins are based on volatility and cannot be used to manage cash prices,” it said in a statement.

Congress had proposed similar measures following the spike in crude oil to near $150 per barrel in 2008 but they were never adopted.

CFTC Chairman Gary Gensler expressed support for the President’s proposal. “The recent increase in prices of gas at the pump affect every American family. It is but another reminder that markets need to be transparent, competitive, and free of fraud, manipulation and other abuses,” he said in a statement. “Furthermore, as markets include both hedgers and speculators, it is critical for market integrity that no single speculator is able to obtain an overly concentrated position.”

The issue of whether speculators in the futures market in general, and long only commodity investment products in particular, are the cause of higher energy prices has been debated since crude oil made all time highs in the mid-2000s but there has been no clear evidence to support it. However, many in Congress blamed speculators for higher prices and provisions in the Dodd-Frank Act required the CFTC to set speculative position limits in energy markets. Those limits were passed in October but have not yet gone into effect.

In the past, CFTC officials in supporting such measures have been careful to point out that the Commission is not a price setting agency. There was no such caution today.

CFTC commissioner Bart Chilton, a longtime advocate of limits, praised the president's proposal. “It is critically important that we kick-start the bureaucracy and get speculative position limits in place, now," Chilton said in an emailed statement. "We have been turning procrastination into an art form by not doing what Congress and the President clearly told us to do.”

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