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CFTC: No Action on Oil
By Wayne Jett (c) November 21, 2007
    In June, 2006, the Permanent Sub-committee on Investigations of the Senate Committee on Homeland Security reported that crude oil prices in 2004 departed from historical patterns relative to supply. Despite U. S. oil inventories being at an eight-year high and OECD inventories being at a 20-year high, crude oil prices rose from $25-$30/bbl in 2000 to $60-$75/bbl in 2006 as hedge funds and then pension funds poured billions into crude oil futures contracts. The Senate report noted that the majority, perhaps the great majority, of trading in such contracts had moved to exchanges unregulated by the Commodities Futures Trading Commission, even though those exchanges have conceded their trading involves a price discovery function. The Senate report observed this price discovery function provides CFTC authority to require reporting from major traders, and strongly urged CFTC to assert its authority without delay so as to assure protection against price manipulation.
CFTC Punts to Congress
    “Only” 15 months later, with changed leadership in Congress and the price of crude oil up another 15%, CFTC held a public hearing focusing on natural gas futures contracts. A month later, in October, 2007, CFTC issued a report to inform Congress of its findings and conclusions. In brief, CFTC complimented Congress for its foresight in creating “tiered” regulation of markets under a law enacted in 2000. The “tiered” regulation largely exempted institutional trading in futures contracts from reporting to CFTC so long as the trading is not done on the NYMEX or other regulated exchanges. CFTC assesses the tiered system as having “operated well.”
    CFTC asserts that, even on exchanges where the price-seeking function occurs in trading of futures contracts, existing law gives CFTC no authority to require reporting of large trades. CFTC recommends several statutory provisions as helpful in its oversight of the presently exempt exchanges, without interfering with innovation of new products and practices at those exchanges.
    CFTC’s October report refers to legislative bills pending consideration in Congress to address these concerns, but the likelihood of any enactment providing improvement in oversight of energy futures trading practices before this Congress ends in December, 2008, is very slim. Thus, the fundamental analysts who predict a collapse of energy prices, particularly crude oil, will almost certainly be disappointed for the indefinite future. ~