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Regulators are probing oil market

A U.S. agency says large investors may be contributing to rising prices at the pump.

May 30, 2008|Maura Reynolds | Times Staff Writer

WASHINGTON — Federal regulators are investigating whether large institutional funds that have been snapping up futures contracts for oil and other commodities may have skewed the market and contributed to rising pump prices.

The Commodity Futures Trading Commission said Thursday that it had opened a probe of large investors, including pension funds and commodity index funds, in December and that it had reached agreements with an overseas commodity exchange to share information about buyers and sellers.

Normally, the commission doesn't disclose ongoing investigations, but it said it was publicizing this inquiry because of "recent dramatic increases in the price of crude oil."

"All Americans are significantly affected by high energy prices -- whether it's paying more at the pump or higher costs for farmers and entrepreneurs," commissioners said in a statement.

A rising dollar helped push oil prices lower Thursday. In New York futures trading, crude for July delivery fell $4.41 to $126.62 a barrel. Traders also reacted to an Energy Department report that an unexpected decline in U.S. oil supplies last week stemmed from delays in unloading tankers. Even with the price decline, the biggest since March 31, the cost of oil has doubled in the last year.

Oil and gasoline prices have become a hot political issue as members of Congress look ahead to national elections in the fall. Members of both parties want to be seen as taking steps to ease the situation for stretched consumers. Democrats are blaming the Bush administration for failing to rein in what they see as possible market excesses.

"It shouldn't have taken oil and gasoline prices hitting Guinness-like record highs for the federal government to look into possible price manipulation by speculators, but it should also be looking at manipulation by oil companies and oil producers," said Sen. Charles E. Schumer (D-N.Y.), chairman of Congress' Joint Economic Committee.

Meanwhile, Republicans have accused congressional Democrats of failing to pursue policies that would increase the supply of oil, such as drilling offshore or in new fields in Alaska.

Last week, 22 senators sent a letter to the Commodity Futures Trading Commission requesting such an investigation into new investors. "Recent investigative reports by Congress and the Government Accountability Office . . . have documented that the lack of oversight on electronic energy future trading platforms . . . may be contributing to today's out-of-control energy prices," the letter said.

The commission's investigation is unlikely to be as deep or sweeping as Democrats have demanded. A commission official, who spoke on condition of anonymity because he is not authorized to discuss ongoing investigations publicly, said the commission's economists were fairly sure that there had been no criminal manipulation of the market.

The commission is trying to see whether the entry of large institutional investors into the commodities market in recent years has had the unintended effect of driving up prices, the official said. The commission said the investigation also included how oil is transported and stored.

Like so much else in the global financial system, commodities trading has become increasingly complicated. Traditional commodities traders buy and sell futures contracts that specify a price and date for delivery of a stated amount of the commodity. Many of them buy the contracts for clients who expect to get the commodity delivered.

Now, however, big investors such as pension funds have moved into the commodities markets via so-called index funds that invest in futures contracts and securities tied to them. Regulators acknowledge that their knowledge of the funds' activities is less than complete.

Part of the investigation is to simply figure out which investors are buying what kinds of financial instruments, the official said. Under the new agreement, the commission will have access to trading data from London markets for delivery in the U.S.

Tom Kloza, chief oil analyst at the Oil Price Information Service, expressed skepticism that the commission would be able to get to the bottom of the situation. He said there might be loopholes in the information exchange agreement that would leave out crucial data.

"Because of the limited jurisdiction of the CFTC and the growth of offshore futures and derivatives markets, oil executives believe the moves are unlikely to result in financial firms being displaced as the major participants in global crude oil and products' markets," Kloza wrote in a note to clients.

Economists are debating just what kind of role institutional investors are playing in the oil markets and whether they can be blamed for the current run-up in prices instead of other factors such as the weak dollar, supply problems and brisk demand in China and other countries.

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