Congress members urge CFTC to set energy position limits

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, July 28 -- Two members of Congress urged the US Commodity Futures Trading Commission to establish and enforce position limits for all energy commodities as opening witnesses at the first of three CFTC hearings on the matter.

US Sen. Bernard Sanders (I-Vt.), who questioned CFTC Chairman Gary G. Gensler’s commitment to regulate aggressively as the Senate considered Gensler’s nomination, began by conceding that Gensler’s actions since taking the CFTC’s helm have been impressive. “But they will all be for naught unless they are followed by aggressive actions by the CFTC to prevent excessive speculation in oil and gas trading,” Sanders warned.

US Rep. Bart Stupak (D-Mich.), chairman of the House Energy and Commerce Committee’s Oversight and Investigations Committee, concurred with Sanders, stating, “A number of reports, market experts, and regulators agree that reform of the derivates market is necessary. Physical hedging, long used to provide liquidity, transparency, and set market prices, is no longer possible due to the manipulation action of financial traders.”

Other witnesses warned that adopting regulations that are too strict could damage markets. “We have not seen empirical evidence that index funds and speculators distort prices, as has been widely alleged, nor is there any proof that putting position limits on these market participants will have any positive effect,” said Craig Donohue, chief executive of CME Group, the parent company of the New York Mercantile Exchange. “We are deeply concerned that inappropriate regulation of these markets will cause participants to move to dark pools and other unregulated markets, causing irrevocable harm to the entire US economy.”

Ben Hirst, senior vice-president and general counsel for Delta Airlines, testified on behalf of the Air Transport Association of America. He said, “The objective should be to allow sufficient speculation to provide sufficient liquidity to enable the market to function efficiently, and no more. While it may not be possible to determine this limit with scientific precision, a reasonable surrogate might be the level of speculative activity on regulated exchanges 10 or more years ago, before the recent explosion of speculation in commodities.”

Clear skies and storms
In his opening statement which began the hearing, Gensler said he thought CFTC should seriously consider setting position limits in energy markets. “As a regulator, we have to ensure for market integrity both when the skies are clear and when there are storms on the horizon. As we consider the effects of large, concentrated positions on the markets, our regulations should address times of volatile or uncertain markets as well as when the markets are stable,” he said.

Gensler added that he was pleased to read in Donohue’s written testimony that CME supports adoption of a hard-limit regime, including single-month and all-months limits, calling it a significant development. But Gensler added that three basic questions remain: What formula should be use to determine where position levels are set? Should they be set by the CFTC or by individual exchanges? Should noncommercial exemptions be provided for financial risk management?

Gensler noted that in CFTC’s position limit exemptions for agriculture commodities, there are three different categories: commercial parties with physical inventory and sales, commercial parties with physical anticipatory needs, and noncommercial entities such as swap dealers. “The commission is taking a close look at whether to eliminate these hedge exemptions for certain swap dealers and possibly create a new risk management exemption,” he said.

Noting that he has introduced legislation requiring the CFTC to use its emergency powers and giving it new authority to curb excessive speculation, Sanders questioned giving any position limit or reporting exemptions to any noncommercial trading entity. “I think the American people would have a hard time understanding why large financial firms are being treated the same way as large trucking companies and other bona fide users of oil products. We have reached a point where the overwhelming majority of trades are conducted by speculators,” he said.

Carbon futures market
Stupak said he has introduced a similar bill, which became part of HR 2454, that contained a global climate change measure cosponsored by House Energy and Commerce Committee Chairman Henry A. Waxman (D-Calif.) and Energy and Environment Subcommittee Chairman Edward J. Markey (D-Mass.). The House approved HR 2454 by a vote of 219-212 on June 26. “This legislation creates an economy wide cap-and-trade program for carbon dioxide and other greenhouse gas emissions,” Stupak said. “Companies will hedge their risks and lock in prices for these carbon credits in a new carbon futures market. The CFTC should have authority to regulate any carbon futures market with strong regulations from the start to prevent price volatility from excessive speculation,” he said.

Stupak noted that since 1991, when the CFTC authorized the first bona fide hedging exemption to a swap dealer (J. Aron & Co., which is owned by Goldman Sachs), “15 different investment banks have taken advantage of this exemption, even though they do not have a legitimate anticipated business need.” NYMEX has granted 117 hedging exemptions for West Texas Intermediate crude contracts since 2006, many of which are for swap dealers without physical hedging positions, Stupak continued. “Swaps are currently excluded from requirements for position limits designed to prevent excessive speculation. An estimated 85% of futures purchases tied to commodity index speculation come through swap dealers,” he said.

Gensler noted that position limits are designed to prevent undue market concentration. “To the extent that financial parties, such as money managers, hedge funds, and swap dealers participate in the futures markets, position limits have the potential to increase liquidity by reducing the positions of the largest traders. Position limits can enhance liquidity by promoting more market participants rather than having one party that has so much concentration so as to decrease liquidity,” he said.

Stupak also said he would like to see foreign boards of trade, such as the InterContinental Exchange and the Dubai Exchange, with significant energy trading operations in this country operate under the same regulations as domestic commodities exchanges. “The CFTC does not have the authority to regulate foreign markets that act as price-setting markets dominated by US energy trading. CFTC must enforce standards on all markets to eliminate loopholes,” he said.

Sanders said his bill contains a similar provision, as well as a conflict of interests section that would bar investment firms from issuing commodity price forecasts from one division while holding a significant position in another unit. “Frankly, the American people are tired of record-breaking Wall Street profits and excessive compensation packages while Americans are losing their jobs. They’re tried of hedge funds betting that the subprime market will get worse. And they’re sick of Wall Street betting that the price of oil will go up while Americans pay millions at the gas pump,” he declared.

CFTC will hold two more hearings on energy commodity position limits and exemptions on July 29 and Aug. 5.

Contact Nick Snow at nicks@pennwell.com.

Related Articles

BG’s 2015 budget ‘significantly lower than 2014’

02/03/2015 BG Group plans capital expenditures on a cash basis of $6-7 billion in 2015, a range it says is “significantly lower than 2014” due to “a lower oil...

BP trims capital budget by $4-6 billion

02/03/2015 BP PLC plans an organic capital expenditure of $20 billion in 2015, down from the previous guidance $24-26 billion. Total organic capital expenditu...

IHS sees second-half end of US output surge

02/03/2015

Expectations are moderating about growth of oil production in the US this year.

Anadarko reports 2014 loss, remains upbeat about Wattenberg

02/03/2015 Anadarko Petroleum Corp. announced a 2014 net loss of $1.75 billion, or $3.47/share diluted, including a net loss of $4.05 billion associated with ...

CNOOC cuts capital budget, starts production from Jinzhou 9-3

02/03/2015 CNOOC Ltd. is slashing its capital budget for 2015 by 26-35% to $11.25-12.86 billion compared with last year’s budget. Capital expenditures for exp...

Seven Group buys into Beach Energy

02/03/2015 Media group Seven Group Holdings, Perth, has bought 13.8% of Adelaide-based Beach Energy Ltd. through share purchases fuelling speculation of a pos...

MARKET WATCH: NYMEX crude oil stays positive on lower rig count

02/03/2015 Oil prices on the New York and London markets closed higher Feb. 2 on positive momentum generated by a falling US rig count, suggesting cuts in pro...

Obama’s proposed fiscal 2016 budget recycles oil tax increases

02/02/2015 US President Barack Obama has proposed his federal budget for fiscal 2016 that he said was designed to help a beleaguered middle class take advanta...

Pessimism mounts over UK offshore industry

02/02/2015

Pessimism about the UK offshore oil and gas industry is gaining momentum.

White Papers

Pipeline Integrity: Best Practices to Prevent, Detect, and Mitigate Commodity Releases

Commodity releases can have catastrophic consequences, so ensuring pipeline integrity is crucial for p...
Sponsored by

AVEVA’s Digital Asset Approach - Defining a new era of collaboration in capital projects and asset operations

There is constant, intensive change in the capital projects and asset life cycle management. New chall...
Sponsored by

Transforming the Oil and Gas Industry with EPPM

With budgets in the billions, timelines spanning years, and life cycles extending over decades, oil an...
Sponsored by

Asset Decommissioning in Oil & Gas: Transforming Business

Asset intensive organizations like Oil and Gas have their own industry specific challenges when it com...
Sponsored by

Squeezing the Green: How to Cut Petroleum Downstream Costs and Optimize Processing Efficiencies with Enterprise Project Portfolio Management Solutions

As the downstream petroleum industry grapples with change in every sector and at every level, includin...
Sponsored by

7 Steps to Improve Oil & Gas Asset Decommissioning

Global competition and volatile markets are creating a challenging business climate for project based ...
Sponsored by

The impact of aging infrastructure in process manufacturing industries

Process manufacturing companies in the oil and gas, utilities, chemicals and natural resource industri...
Sponsored by

What is System Level Thermo-Fluid Analysis?

This paper will explain some of the fundamentals of System Level Thermo-Fluid Analysis and demonstrate...
Available Webcasts


Prevention, Detection and Mitigation of pipeline leaks in the modern world

When Thu, Apr 30, 2015

Preventing, detecting and mitigating leaks or commodity releases from pipelines are a top priority for all pipeline companies. This presentation will look at various aspects related to preventing, detecting and mitigating pipeline commodity releases from a generic and conceptual point of view, while at the same time look at the variety of offerings available from Schneider Electric to meet some of the requirements associated with pipeline integrity management. 

register:WEBCAST



On Demand

Global LNG: Adjusting to New Realities

Fri, Mar 20, 2015

Oil & Gas Journal’s March 20, 2015, webcast will look at how global LNG trade will be affected over the next 12-24 months by falling crude oil prices and changing patterns and pressures of demand. Will US LNG production play a role in balancing markets? Or will it add to a growing global oversupply of LNG for markets remote from easier natural gas supply? Will new buyers with marginal credit, smaller requirements, or great need for flexibility begin to look attractive to suppliers? How will high-cost, mega-projects in Australia respond to new construction cost trends?

register:WEBCAST


US Midstream at a Crossroads

Fri, Mar 6, 2015

Oil & Gas Journal’s Mar. 6, 2015, webcast will focus on US midstream companies at an inflection point in their development in response to more than 6 years shale oil and gas production growth. Major infrastructure—gas plants, gathering systems, and takeaway pipelines—have been built. Major fractionation hubs have expanded. Given the radically changed pricing environment since mid-2014, where do processors go from here? What is the fate of large projects caught in mid-development? How to producers and processors cooperate to ensure a sustainable and profitable future? This event will serve to set the discussion table for the annual GPA Convention in San Antonio, Apr. 13-16, 2015.

This event is sponsored by Leidos Engineering.

register:WEBCAST


The Future of US Refining

Fri, Feb 6, 2015

Oil & Gas Journal’s Feb. 6, 2015, webcast will focus on the future of US refining as various forces this year conspire to pull the industry in different directions. Lower oil prices generally reduce feedstock costs, but they have also lowered refiners’ returns, as 2015 begins with refined products priced at lows not seen in years. If lower per-barrel crude prices dampen production of lighter crudes among shale plays, what will happen to refiners’ plans to export more barrels of lighter crudes? And as always, refiners will be affected by government regulations, particularly those that suppress demand, increase costs, or limit access to markets or supply.

register:WEBCAST


Emerson Micro Motion Videos

Careers at TOTAL

Careers at TOTAL - Videos

More than 600 job openings are now online, watch videos and learn more!

 

Click Here to Watch

Other Oil & Gas Industry Jobs

Search More Job Listings >>
Stay Connected