Reining In the Oil Speculators

Oil prices have subsided, but some in Congress say more regulation of the futures markets is still needed

By Moira Herbst

Institutional investors drove oil prices to all-time highs this summer, and the same players are also responsible for much of the $44-per-barrel loss since then, according to a Sept. 10 report that is being used to bolster calls for greater trading regulation.

The report from a hedge fund investor who has grown prominent in the oil speculation debate, Michael Masters, comes as crude oil has staged a 28% retreat in the past two months. But Masters and backers of his report—including many congressional Democrats—say prices could return to previous highs if reform legislation isn't passed. "Americans won't stand for being held up at the pump by these Wall Street scoundrels every time they fill up their gas tank," Senator Maria Cantwell (D-Wash.) said on Sept. 10 at the report's release. She was joined by Masters, Adam K. White of White Knight Research & Trading, Senator Byron Dorgan (D-N.D.), and Representative Bart Stupak (D-Mich.).

According to Masters' report, an influx of "long-only" investors—large investors like pension funds and endowments that bet prices would rise—poured into the oil market in recent years. Their investments reached a peak on July 11, when oil prices hit an all-time high above $147 per barrel. Then, beginning on July 15, institutional investors "began a mass stampede for the exits" of commodities indexes like the S&P Goldman Sachs Commodity Index, according to Masters. Investors withdrew about $39 billion from the index, resulting in the selling of about 127 million barrels of West Texas Intermediate crude futures. The report says that crude futures have dropped by about $29 per barrel as a result of this selling.

Swaps Arrangements

The Commodity Futures Trading Commission (CFTC), the agency charged with regulating U.S. futures markets, declined to comment on Masters' report. CFTC Chairman Walter Lukken is scheduled to testify on Sept. 11 for the House Agriculture Committee about recent developments in commodities markets.

The agency also plans to release the results of its inquiry of the scope of commodity index trading in the futures markets by Sept. 15. The institutional investors Masters' report targets typically make their "long-only" investments through swaps arrangements with banks like Goldman Sachs (GS) and Morgan Stanley (MS). In June the agency announced it had issued "special call" requests to swap dealers requiring them to provide information on investments in commodity indexes.