Congress takes aim at oil speculators

Record prices have prompted a slew of bills to curtail the role of investors, but traders say they could backfire.

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By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Fed up with soaring oil prices and a chorus of people blaming Wall Street speculators, Congress is considering a host of rules aimed at limiting the inflow of investor money into oil contracts.

But oil traders urge caution. While more disclosure is a good thing, they say making it harder for speculators to invest in oil futures could have the opposite effect intended, and send prices higher.

In light of oil's phenomenal climb from under $50 a barrel to nearly $140 in less than 18 months - and the public belief that Wall Street traders were behind the rise - Congress is awash in bills that attempt to limit the role of speculators. Several have bipartisan support and could soon become law.

"In two days, the price of oil rose $16," said Sen. Richard Durbin, D-Ill., at a joint hearing of two Senate panels on oil speculation Tuesday. "Did I miss something, was there some war in the Middle East?"

"No, something is going on besides supply and demand, and it could be excessive speculation," he added.

Proposals have included requiring foreign exchanges to provide more information about crude oil trades, limiting the number of contracts speculators are allowed to hold, increasing the amount of money speculators need to put up to buy an oil contract, and removing speculators from the market entirely and limiting trade to just producers and consumers.

Government regulators said they are monitoring the markets for evidence of manipulation - someone withholding production in an attempt to bid up prices - and are gathering more information on the role speculators play.

"If the CFTC sounds busy, it is," said Walter Lukken, acting chairman of the Commodity Futures Trading Commission. "This small agency is working hard to protect the public from manipulation and abuse."

Lukken said the CFTC has just reached an agreement with the IntercontinentalExchange (ICE) in London for that exchange to comply with U.S. disclosure rules - basically letting regulators know who is buying oil contracts.

Oil traders say requiring more information from foreign exchanges is a good idea, as markets function better the more transparent they are.

But they urge lawmakers not to hamper speculative trading. They say big oil users such as refiners or airlines - unable to find a counter party to offset their bets - could send prices higher by hoarding product or through panic buying.

"They have to be very, very careful with what they're doing here," said Phil Flynn, senior market analyst at Alaron Trading in Chicago. "I always worry when politicians think they know better than the market what the price of oil should be."

Another trader agreed, especially when it comes to doing something such as raising margin requirements, the amount of money traders are required to put up to buy contracts.

"You're raising the cost of doing business for the people who need the futures market," Stephen Schork, publisher of the industry newsletter The Schork Report, told CNNMoney.com. "In the long run, it's bullish."

CFTC's Lukken also said raising the margin requirement may have a negative effect.

"Margin (requirement) is a very blunt tool, and it could potentially drive markets overseas" where there is even less regulation, said Lukken.

A spokesman for Sen. Durbin said proposals to raise the margin requirements have been removed from legislation after lawmakers listened to concerns from the industry.

The airline industry, a big user of oil, urged Congress to take action.

"Crude oil prices today are unnecessarily high and distorted due, in large part, to market manipulation and excessive speculation," Jim May, president of the Air Transport Association, said at the hearing. "The impact of these unprecedented jet fuel prices on the airlines is devastating and airlines may see 2008 losses nearing $10 billion, on par with the worst financial year in aviation history."

May called on Congress to enact more oversight of foreign exchanges, and to "curtail extremely risky investments by pension funds that jeopardize savings for employees across the country." To top of page

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