Regulators taking first major step toward setting limits on trading in energy futures

CFTC proposing oil-trade limits

WASHINGTON — Federal regulators are taking a first step toward reining in speculative trading in energy futures by Wall Street firms and other market players.

At a public meeting Thursday, the Commodity Futures Trading Commission discussed whether to propose new trade limits on the New York Mercantile Exchange and the Intercontinental Exchange to keep fund managers and other speculative investors from wielding excessive influence in the market.

The move by the five-member CFTC marks a shift in government policy, contrasting with the agency’s hands-off approach in recent years toward the volatile oil futures markets. While the CFTC is an independent agency, its stance was in sync with the Bush administration’s general opposition to tighter regulation in the financial industry.

Whether the move is enough to control future spikes in energy prices remains to be seen.

A CFTC proposal on trade limits will be only a preliminary step. The agency will ask for public comment on the proposal for a 90-day period and could formally adopt it sometime afterward.

The number of speculators — investors who make money by trading oil contracts — has risen on the Nymex in recent years. They mostly bet that oil will get more expensive, leading many to believe that their activity in the market jacks up prices.

The restraints would apply to futures trading in natural gas; light, sweet crude oil, known as West Texas Intermediate; and New York Harbor heating oil and gasoline.

CFTC officials said the limits as proposed could require trading cuts by around 10 firms.

The limits would apply to traders’ total positions in futures and options contracts. Exemptions would be available for “bona fide” hedging transactions.

CFTC Commissioner Michael Dunn warned that imposing new limits on energy trading without the agency having authority to regulate the over-the-counter derivatives market could mean “that we will in fact end up with less transparency in the market than we currently have.”

Federal regulation of the shadowy $600 trillion market for derivatives, the complex financial instruments blamed for playing a role in the crisis, is before Congress. It is included in sweeping legislation to overhaul financial regulation that passed by the House last month.

Commissioner Bart Chilton said the proposal was balanced. “We have erred on the high side here,” he said, meaning the limits are set high enough that most exchange-traded funds and other speculative investments wouldn’t immediately feel pressure to change their trading practices.

However, Chilton said, caps on speculative trading also should be extended to the markets for metals and agricultural products.

After a roller-coaster ride from the highs of 2008 to the lows of 2009, oil prices are again on the rise. They hit $83 a barrel this week, about twice the price they fetched last year even though the U.S. is using less petroleum. Prices eased off those highs on Wednesday and again on Thursday.

Speculators are again being blamed for boosting prices to levels not justified by global demand.

While some blame speculators for recent price rises, many traders say the rally started as frigid weather boosted demand for heating oil.

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Kahn reported from New York.