(In 13th paragraph, corrects analyst’s company to Citigroup
instead of Credit Suisse)
* Obama proposes giving CFTC control of oil margins
* Many cry ‘politics’, but what would be impact if passed?
* Traders say it would give more market share to large hedge
funds
By David Sheppard
April 19 (Reuters) – U.S. President Barack Obama’s bid to
dampen the influence of oil speculators by having regulators set
trading margins could backfire, potentially making prices even
more volatile and leaving crude dominated only by those with the
deepest pockets.
Under Obama’s request to Congress, the Commodity Futures
Trading Commission (CFTC) would determine how much speculators
need to pay to trade U.S. crude oil futures, in theory
increasing the amount when prices move too far, too fast.
But economists and traders cautioned that pushing smaller
investors out of markets would only hand greater influence to
the largest hedge funds and Wall Street banks. Ultimately, there
may not be enough traders left to do business with oil producers
and consumers looking to hedge their needs.
“Reduced liquidity often means greater volatility,” said
broker Jay Levine at Enerjay LLC in Maine.
“That’s the exact opposite of (Obama’s plan’s) purpose”.
Exchange-operator CME Group, which currently sets margin
requirements for the benchmark U.S. crude oil contract, on
Tuesday called the president’s plan “misplaced”, and said
speculation should not be confused market manipulation.
CME charges separate margin rates for speculators and
end-users of oil such as airlines, who are hedging their
physical needs.
One contract of benchmark U.S. crude, commonly known as West
Texas Intermediate or WTI, had a notional value of just under
$103,000 on Thursday, based on a standard 1,000 barrel contract
and prices around $102.50 a barrel.
Traders defined as speculators can buy that contract for an
upfront cost of just $6,855, with a maintenance margin of
$5,500. Those defined as hedgers would pay $5,100 upfront with a
maintenance margin also of $5,100.
EXISTING POWERS
While Obama’s bill currently has little hope of making it
through a divided Congress, a price spike before November could
boost cross-party support from politicians wary of siding with
oil traders in an election year.
Two large waves of speculators have surged into oil markets
in the last 14 months due to the supply disruption in Libya and
plans for increased sanctions on Iran’s oil exports this year.
Prices rose on both moves, but some industry experts believe
prices could have risen even more without their influence.
“The attack on speculation is an attack on better
functioning markets,” said Edward Morse, global head of
commodities research at Citigroup.
“If there were not liquidity in the futures market… the
chances are overwhelming that price volatility would be
greater.”
The CFTC already has emergency powers to raise margins,
though they have rarely exercised them. Last year, when the
supply shock in Libya was big enough to spark a coordinated
stockpile release by the International Energy Agency, the CFTC
declined to pull the margin trigger, despite speculator
positions hitting an all-time high.
That raises the question of whether they would increase them
in the event of a future supply disruption, if they were also
tasked with setting margins day to day.
“When markets are very volatile and they are afraid about
banks buying too much oil on leverage, it gives them a tool,”
said Amy Jaffe, energy policy expert at Rice University’s Baker
Institute in Houston.
“(But) would a politician actually have the guts to use it?
If you use it when we are already in a horrible crisis, it is
too late.”
Michael Wittner, global head of oil research at Societe
Generale in New York and a former analyst at the IEA, said he
didn’t expect regulators to become more active, even if they are
handed more powers.
“The CFTC already works very closely with the exchanges,”
Wittner said. “They’re going to continue to rely on their
expertise.”
SPECULATOR SURGES
Many traders and market analysts noted that speculators tend
to buy crude when there is a strong underlying reason to do so
such as the loss of Libyan crude last year or sanctions and
possible military action against Iran.
Between February and March 2011, when Libya’s crude oil
supplies were first cut by fighting in the country, speculator
bets that crude oil prices would rise on the New York Mercantile
Exchange (NYMEX) shot-up from 185,236 contracts to an all-time
high of 311,632, CFTC data showed.
With each contract equal to 1,000 barrels of oil, that’s the
equivalent of over 125 million extra barrels of oil (roughly 1.4
days of global demand) bought in less than a month.
Prices spiked by $15-$20 a barrel over the period, though
many argued it was natural for prices to rise given almost 2
million barrels per day of light sweet crude had been lost from
a finely balanced market.
“The CFTC understands that markets can be volatile,” said
Jason Schenker, president of Prestige Economics in Austin,
Texas.
“Leaving people at the risk of sudden margin increases could
deter investment in oil markets that is critical in the
long-run.”
This year, with pending sanctions on Iran’s oil exports and
concerns about a possible military confrontation, speculator
bets on higher prices increased about 43 percent, from just over
190,000 to 272,032 between January and March. Prices rose over
that period from $99 to a peak of $110.55.
But over the last five weeks, speculators unwound net-long
positions back to the level they were at the beginning of
January, as expectations waned for a confrontation between
Israel and Iran.
Hedge fund manager John Kilduff said that while politicians
had been quick to criticize speculators in oil, they’ve been
quiet about speculators in the natural gas market, who have been
betting on lower prices since at least June 2009, according to
data from the CFTC.
Natural gas prices hit a 10-year low below $2 per
million British thermal units on Thursday due largely to booming
domestic shale gas production.
“We look forward to seeing the natural gas market
speculators feted at the White House soon for their work in
reducing prices upward of 90 percent in several short years,”
Kilduff said.
(Reporting By David Sheppard)
