Rising gasoline prices reignite commodities speculation debate

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Mar. 18 -- Rising gasoline prices have reignited debate over whether energy commodities regulation should include new curbs on speculation as Congress heads into a week-long recess. The discussion comes as the US Commodity Futures Trading Commission considers ways to implement its new authority under the Dodd-Frank financial reform law.

Twelve US Senate Democrats and Sen. Bernard Sanders (I-Vt.) sent a letter to CFTC Chairman Gary G. Gensler on Mar. 17 asking him to impose new margin requirements now. “The Commitment of Traders Report reveals that speculators have flooded into the market in recent weeks,” they said.

The lawmakers, who include Sens. Bill Nelson (Fla.) and Maria Cantwell (Wash.), said money managers have increased their long positions on New York Mercantile Exchange West Texas Intermediate crude futures contracts by more than 35%, or the equivalent of 75 million bbl, since protests began in Egypt on Jan. 25. “Oil speculators have increased long positions on the Intercontinental Exchange by nearly 50%. At the same time, actual true hedgers have reduced their long positions in the oil futures markets,” they said.

They urged Gensler to act quickly to raise margin requirements for speculative oil contracts. “The margin increase should only apply to speculators, not true hedgers,” they emphasized. “This is consistent with current exchange policies that apply different margin requirements for investors and bona fide hedgers.”

The group did not include Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM). Instead, he said in a Mar. 17 Senate floor speech that US Energy Information Administration Administrator Richard G. Newell and other experts told a briefing he and the committee’s ranking minority member, Lisa Murkowski (R-Alas.), held for their colleagues on Mar. 15 that political unrest across North Africa and the Middle East is the main reason oil and gasoline prices have increased recently.

Oil markets react
Bingaman said, “When the world’s key oil producing and exporting region…is unstable, world oil markets are also unstable. When political unrest threatens major chokepoints in the world oil transit routes, world oil prices react, as they have.”

Bingaman suggested that for the US to reduce its dependence on imported oil, the Senate should work on expanding the US renewable fuel industry further, move the timeline forward for market penetration of electric vehicles, and make sure that natural gas vehicles are used as much as realistically possible. “Every barrel of oil that we displace from the transportation sector, and that we therefore do not need to consume in the United States, makes our economy stronger, not to mention our personal pocketbooks, and less vulnerable to the volatility of the current marketplace,” he said.

Responding to a Democratic committee member’s question about speculation and gasoline prices at a House Natural Resources Committee hearing the same day, Newell said national economies outside the US are recovering more quickly and increasing their demand for crude and products. This is the primary reason prices have risen quickly, Newell said.

The American Petroleum Institute, as it released its latest monthly statistics on Mar. 18, indicated that US product demand also is recovering. Total deliveries during February rose 4.4% year-to-year to 9 million b/d, a 3-year peak for the month, while gasoline deliveries increased 4.2% from February 2010’s level to 9 million b/d, a record for the month. Ultralow-sulfur distillate deliveries jumped 17.6% year-to-year, and high-sulfur distillate deliveries were 30.6% higher. Jet fuel deliveries rose 7.1% from February 2010, putting them at a 3-year peak for the month, API said.

‘Welcome news’
“The boost in deliveries reflects an economy gaining strength,” said John C. Felmy, API chief economist. “The Federal Reserve survey indicates an expansion in business and manufacturing. So it’s no surprise we’re seeing growth in petroleum deliveries. It’s welcome news for fuel producers and for the economy.”

One CFTC commissioner, meanwhile, said the issue of passive investors’ potential influence on commodity markets, which was so prominent when oil prices spiked and then fell in 2008, is emerging again. “I've said several times that I don't think these investors are the cruise control of prices, but I do think they tap the gas pedal,” Bart Chilton said Mar. 16 in opening remarks to the Futures Industries Association’s panel discussion on financial investors’ impacts commodity impacts in Boca Raton, Fla. “I think they can have some effect on driving prices up when they are long in the markets, and I believe they can have some effect on declining prices when they exit.”

After he cited 10 studies supporting the view that speculators can influence commodity prices, Chilton noted that Ernest Hemingway once said: “If you really want to write, start with one true sentence, and from that sentence, you can form your opinion of the truth.”

“Well, here is that sentence: We have more speculative positions in commodities markets than we have ever had in the past—in fact, they are up 64% in the energy complex from June of 2008,” Chilton continued. “You can draw your opinion of the truth, your own conclusions as to whether there is a cause-and-effect—looking at the price trends as these investors enter and exit markets. Read the studies, on both sides of the issue, and draw your own conclusions.”

Contact Nick Snow at nicks@pennwell.com.



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