Talk of curbing speculative trading in petroleum markets has the potential to bleed into the gas market, according to industry insiders, who warned that, despite the historically high price of commodities, the reining in of such players could have devastating effects on energy trading.
Connecticut Representative John Larson, a Democrat, said in March 2008 that he planned to introduce legislation to remove speculation in energy futures trading by requiring marketers to have the capability to take delivery of the product in which they are trading.
Prices continue to rise for energy products, reaching all time highs week after week.
Although aimed primarily at the petroleum markets, where the price of crude oil (see chart: NYMEX WTI crude 1Mo) has run largely above $100/barrel for months, the proposed legislation would reduce speculation in gas trading as well, he said.
"Prices continue to rise for energy products, reaching all time highs week after week," Larson said in a statement. "But, the demand for the oil and gas is not increasing. These costs are stretching wallets to the brink and making it hard for people to make ends meets."
Senator Byron Dorgan, a North Dakota Democrat, also questioned the issue of speculation in the oil markets, saying petroleum futures trading "has become an orgy of speculation" that has driven up oil prices well beyond what fundamentals might dictate.
Dorgan, for his part, suggested Congress increase margin requirements on the oil futures market, making it more expensive for traders to invest in petroleum commodity futures.
He said futures traders typically pay a margin of 5% to 7% of the commodity value, while stock traders can pay as much as 50% of the product's value.
"I understand the need for a futures market and I understand the need for liquidity in that market," Dorgan said (podcast: Speculative trading essential for energy market depth & liquidity ). "But what I don't understand is that people are buying oil even though they'll never get it from people who never had it, and making big profits as they run up the price of oil."
Deeming the prospects of removing or diminishing speculation in energy markets "ludicrous," Michael Haigh, director of commodity derivatives trading with Société Générale, said controversy in petroleum markets naturally tends to drag the gas market along for the ride as well.
"If one was just to remove this massive class of trader, there'd be no way to provide liquidity," said Haigh, a former economist with the Commodity Futures Trading Commission (CFTC).
From a marketer's perspective, Haigh said his trading floor typically does not see any consistent price movement in oil or gas as the result of the activities by a single class of traders.
"There's so much liquidity and such movement" among a wide variety of traders, from investment banks to hedge funds to end-users, "we'd know if one particular player ... was moving the market," he said.
David Schryver, legislative executive vice president with the American Public Gas Association, said that while his association does not typically track petroleum-related issues, some of his colleagues in the oil industry are certainly concerned about the talk to limit the activities of speculators.
"We think certainly speculators have an important role to play in terms of providing liquidity," Schryver said, adding that he has not yet heard a similar call to limit speculative trading in the gas market.
He added that improving market transparency, such as boosting the oversight capabilities of the CFTC, will be effective in deterring trading abuses and fraud - from speculative players or otherwise.
Jenny Fordham, director of energy markets with the Natural Gas Supply Association (NGSA), also said she has not heard any rumblings on the issue of gas market speculation since the CFTC held its September 2007 conference on exempt market oversight.
Fordham said the composition of the gas market, from physical supply sources to trading activity, is vastly different from that of petroleum markets and she touted the flexibility marketers have on the gas side.
"If you don't like what's going on in the futures or the financial market, you can do it elsewhere," she said. "The physical market is highly transparent and very robust."
Fordham said the gas market's transparency and liquidity has led to a high degree of confidence that the system is healthy. "If [traders] didn't believe the market worked, they wouldn't be participants in the market," she said.
Next page: The importance of speculative players
Created: May 8, 2008
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