By Terry Scruton
It has taken quite some time to do it, but the Commodity Futures Trading Commission in January proposed a rule that would set limits on some speculators in the oil market. The question is, does the rule go far enough?
Speculation is defined as trading in a commodity by a group or trader that has no legitimate commercial interest in that commodity. In the oil market, for example, those who have commercial interest would be those who use oil – trucking companies, airlines, and so on. An airline may choose to buy oil contract futures at a given price to hedge against future rises in prices.
A speculator, on the other hand, buys those same oil contract futures as an investment, with no real intention of ever taking physical possession of that oil. Excessive speculation is what happens when non-commercial interests set the price in a given market, rather than the typical market forces of supply and demand.
A prime example of this happened in the summer of 2008 when oil prices came close to $150 a barrel.
The new regulation from the CFTC would put position limits on the amount of trading speculators are allowed to do on a given commodity.
Dan Berkovitz of the office of general counsel for the CFTC, outlined some of the problems that can happen when large traders engage in excessive speculation in a given market. He said that because this has been known to cause problems in the past, the commission is well within its rights to do something to prevent it from happening in the future.
Some critics outside of the commission said that the proposed regulation sets limits that are too high, and it would only affect a handful of traders. By the commission’s own admission, the limits would affect 10 traders in all. Those traders were not named.
However, several commissioners said the reasoning behind keeping the limits high was the fear that setting them too low would drive traders to unregulated markets.
In spite of the objections, the commission agreed to a proposed rulemaking in January. The comment period on that rulemaking is open through April 26. LL