Calming the Swings in Oil Prices


Based on huge swings in oil prices this year, federal regulators said Tuesday that they were considering new restrictions on “speculative” traders in markets for oil, natural gas and other energy products, the New York Times reported.


For the past two decades a more hands-off approach was the norm in market regulation, but President Obama has brought with him a shift toward stronger government oversight.


The Obama administration has proposed an overhaul of the financial regulation,  and regulators of oil and gas trading have said they are willing to take steps toward such an overhaul using their own powers, without waiting for Congress.


The Commodity Futures Trading Commission said it would consider putting volume limits on trading of energy futures by purely financial investors. Already it has adopted stronger information requirements aimed at identifying the role of hedge funds and traders who swap contracts outside of regulated exchanges like the New York Mercantile Exchange, the New York Times reported.


“My firm belief is that we must aggressively use all existing authorities to ensure market integrity,” said Gary Gensler, chairman of the commission, in a statement. He said regulators would also examine whether to impose federal “speculative limits” on futures contracts for energy products. His proposals could encounter opposition from large banks and Wall Street firms.


Oil prices climbed to a record high of $145 a barrel last summer, then fell to $33 a barrel last December and have since increased to more than $60. The swings are a result of chaos in the global financial system, as banks and much of Wall Street came close to collapse last September and the global economy fell into a severe recession. But many critics are pointing fingers at those betting on the direction of energy prices for the instability in oil prices.


“It is the regulatory authority’s business to make sure the markets work,” said Edward Morse, head of research at LCM Commodities, a brokerage in New York. “If there’s a lesson of that last few years, it’s that the markets haven’t been functioning as well as they should have been.”


Gensler appears focused on limiting the volume of trading by purely financial investors as opposed to businesses like airlines or oil companies that consume or produce oil and want to minimize big fluctuation in price.


The commission also announced it will publish more detailed information about the activity of hedge funds and new information about traders who swap energy contracts outside of traditional exchanges.




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