WASHINGTON — Federal regulators on Thursday took a first step aimed at reining in oil speculation, proposing new limits on trading in energy futures by Wall Street firms and other market players.
At a public meeting, the Commodity Futures Trading Commission voted 4-1 for new trade limits on the New York Mercantile Exchange and the Intercontinental Exchange intended to keep fund managers and other speculative investors from wielding excessive influence in the market.
The proposal is open to public comment for 90 days. It could be formally adopted sometime afterward, possibly with changes.
The move by the 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.
Several CFTC commissioners voiced concern about the proposal, warning it could drive trading business to unregulated markets offshore. Except for commissioner Jill Somers, though, they agreed to float the proposal for public input.
Somers, who came to the CFTC from the derivatives industry, said the agency should "make an affirmative finding" that speculative trading has fueled oil price spikes before imposing limits.
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 big 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."
John Hyland, whose U.S. Oil Fund controls billions of dollars in energy contracts, said something like that could happen. If there are new caps on the number of futures contracts, he told The Associated Press, traders like him may skirt the limits by moving some of their trading business to overseas exchanges and the unregulated OTC market. Or they may simply split their funds into smaller ones that meet the new limits, he said.
Federal regulation of the shadowy $600 trillion market for derivatives, the complex instruments blamed for playing a role in the financial crisis, is before Congress. It is included in sweeping legislation to overhaul financial regulation passed by the House last month.
Commissioner Bart Chilton said the proposal on energy futures trading 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.
Whether limits on trading energy futures will be enough to control future spikes in energy prices remains to be seen.
After a roller-coaster ride from the highs of 2008 to the lows of 2009, oil prices were again on the rise recently. 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.
While some blame speculators for recent price rises, many traders say the rally started as frigid weather boosted demand for heating oil and demand rose in developing countries like China.
The proposed limits are "not going to have a huge effect, and that's prudent," said Kenneth Medlock, a Rice University economist who has studied the influence of speculators on oil trading. "The last thing you want is to impose something that will give you consequences that you didn't foresee."
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