Speculators could liquidate commodity holdings faster

Washington/Chicago: The prospect of federally set position limits on US futures exchanges and over-the-counter trades may spur speculators to get out of commodity markets faster.

Investors began reducing commodity holdings well before the financial crisis hit Wall Street last week, with the strengthening dollar making commodities less attractive to overseas investors and recession fears in the US paring lofty demand forecasts for raw materials.

But the anti-speculation bill covering oil and agricultural futures that passed the US House, but still must be taken up by the Senate, would encourage more liquidation.

"It will cause people to cut down on huge positions," said a trader at a large investment fund.

"People are afraid Congress was going to pass something like this for a while, so they cut back positions already."

There are major hurdles to enacting the anti-speculation bill, congressional staff workers said.

It passed the House by a wide margin, but there is less interest in the Senate and time is running short in this year's session. The White House has threatened to veto the bill.

A coalition of financial services groups said the House bill would mean, "increased volatility and price instability as a result of restricting access to the commodities markets."

"H.R. 6604 will impair the ability of pension plans, university endowments, charitable foundations and mutual funds to protect their beneficiaries and shareholders by making it more difficult to hedge various forms of financial risks and shield them from market downturns," a statement by the coalition said.

Carrot and stick

It was unclear if anti-speculation provisions could piggyback on the Bush administration financial package expected to be debated next week in Congress.

All the same, several senators support stronger rules for futures markets.

"Speculation has always been part of the price discovery process, but excessive speculation distorts prices and has to be stopped," said Senate Agriculture Committee chairman Tom Harkin, Iowa Democrat.

All-out attack

Harkin said the Commodities Futures Trading Commission "must have the authority, the human and technical resources and the resolve to ensure that excessive speculation in the energy markets is identified and eliminated."

Besides mandating position limits on major oil and agricultural futures contracts, the bill empowers the CFTC to set limits on look-alike contracts traded over the counter and puts more controls on exemptions for hedgers.

Whether the commodities market boom will resume or not, even if anti-speculation measures stall, is cloudy at best.

A multi-year rally, which took prices of most commodities to historic highs, began losing steam this year.