Business | Oil & Gas
US-UK oil trade rules could trigger widespread regulation
A transatlantic deal in the works to cap speculation in London oil futures trading is a baby step toward wider market oversight and should not initially slow the flood of money into commodities.
- Reuters
- Published: 23:44 June 15, 2008
New York: A transatlantic deal in the works to cap speculation in London oil futures trading is a baby step toward wider market oversight and should not initially slow the flood of money into commodities.
For hedge funds and other investors, energy and agriculture markets have been one of the hot plays of the year. Even as regulators move to counter the ripple effect of runaway commodity prices, tougher steps may still be needed to restrict speculation and alleviate global worries about inflation and food supply.
"I don't think this particular activity is going to have a big effect, but I think eventually the government's continued nibbling will have a big effect," said a commodities trader at a US hedge fund. "It's a sign of what's to come."
Tempering the binge
Even a slightly tighter regulatory environment and greater government scrutiny could temper the binge. If it does not, it would bolster the argument of investors who point to demand from China and a refining and production infrastructure which has not expanded in line with the need for oil.
"Psychologically, it has some impact, but the bottom line is that it doesn't really change the fundamentals of the market. At the end of the day, it will probably be of only passing interest," said Jim Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.
"The intent, I guess, is to dislodge some speculative longs from the market, and to some extent that may happen, but the longs that are currently involved have some pretty deep pockets," he said.
Meanwhile, a bipartisan bill introduced by two US lawmakers would give the US futures markets regulator more authority to regulate overseas trading of crude oil contracts on a US-based electronic exchange. IntercontinentalExchange, the parent of ICE Futures Europe, is based in Atlanta.
Electronic trading of WTI contracts on a London exchange operated by ICE is exempt from most CFTC oversight, even though such contracts are linked to the New York Mercantile Exchange's contract, which has a delivery option in Cushing, Oklahoma.
US regulators are concerned that the London exchange does not have position limits comparable to the New York Mercantile Exchange, which has a 75 per cent market share in the WTI oil contract. ICE has a 25 per cent share.
But there is less to the deal than meets the eye, analysts said. Only the front month WTI futures would be subject to restrictions on how many contracts an investor could hold.
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