The US should impose new limits on oil and gas futures trading to prevent distortions in prices, two big Wall Street speculators told an official hearing. The support from two hedge funds, coming from an industry that has often resisted regulation, boosts efforts by the US government to impose limits on the number of positions, or contracts, that investors can take, in the name of preventing market manipulation.
Investors seeking to profit from commodities had harmed buyers of physical oil and natural gas, such as airlines, manufacturers and haulage firms, and caused wild swings in the oil price, said Michael Masters of Masters Capital Management, a hedge fund. "Investors' desire to turn the commodity derivatives markets into something they are not, namely a valid investment vehicle, must be subjugated to the needs of bona fide physical hedgers to hedge their risks and discover fair prices," Mr Masters told the Commodities and Futures Trading Commission (CFTC), in the last of three hearings on possible limits on trading.
He said the cure for excessive speculation was a limit on speculative positions. Critics of the present system, including OPEC, say that speculators such as hedge funds and exchange-traded funds (ETFs) have increased the volatility of oil prices by buying and selling thousands of contracts at a time with the goal of turning a profit. Increased interest in oil futures outside the circle of traditional oil buyers drove prices up to record levels last summer, they say, and are threatening to do so again this year.
Many fund managers, however, say that speculators are a crucial component of determining a fair price for any commodity. More limits on market participation, they argue, will reduce the liquidity of the market and actually increase volatility. John Arnold, the head of Centaurus Advisors, a $5 billion (Dh18.3bn) commodity-focused hedge fund, urged the adoption of position limits on physically traded gas, saying they would eventually work in his interest because it would preserve faith in the market.
"Our primary role in the market is to provide liquidity to the commercial hedger," he said. "Undue influence in the market creates distrust, and that distrust can lead to withdrawal of commercial hedgers from the market." Opponents of new regulations say that regulators have little hard evidence that speculators are to blame for volatility. John Hyland, the chief investment officer of US Commodity Funds, one of the country's largest ETFs, said criticism of ETFs, which are indexed to oil price movements, amounted to "self-serving statistical gibberish".
He said analysis showed that investors in his fund had tended to sell contracts when oil prices were increasing, and buy contracts when prices were falling, which proved, he said, that the fund had not unduly influenced prices. "Any time anybody tells you that 'common sense' tells you something, it means you don't have the data to support it," he said. This year's rise in oil prices, for example, was due to optimism about the state of the economy, not the involvement of speculators, Mr Hyland said.
"If you believe in green shoots, this is rational," he said. "If the green shoots are real, maybe oil goes up to $100, if the green shoots are not real, maybe oil goes to $40." cstanton@thenational.ae