March 30, 2012

Markey, Wyden to CFTC: Are Commodity Investment Funds Skewing Oil Market?

Democrats Say New Rule Needed to Restrict Oil Index Funds

Washington, D.C. – Two Democratic lawmakers today asked the government agency tasked with regulating the nation’s commodities markets -- which includes crude oil futures and other derivatives trading -- to investigate whether commodities index funds are artificially inflating the price of oil. The letter, written by Rep. Ed Markey (D-Mass.) and Sen. Ron Wyden (D-Ore.), was sent to Commodity Futures Trading Commission Chairman Gary Gensler.
In their letter, the lawmakers express concerns that commodity index funds, are “disrupting both our commodities markets and our economy.” They note that, “Commodity index funds are a relatively recent creation, but they are already having an outsized impact on our commodity markets,” and that “Through its control of commodity index funds, Wall Street is driving up gas and food prices and playing a sadly familiar game with the American consumer and small-business: heads I win, tails you lose.”
The letter can be found HERE. Rep. Markey is the top Democrat on the Natural Resources Committee and Sen. Wyden is a senior Democrat on the Senate Energy and Natural Resources Committee.
Commodity index funds are similar to other financial products in that they spread investments around to reduce risk. However, while other index funds usually invest in a basket of stocks or bonds that seek to replicate various market indices and can be held for long duration as a passive investment, commodity index funds include actual deliverable products -- none more tangible and visible than the price of oil and its effect on gasoline prices.
Unlike stocks, oil contracts expire when it is time to deliver the actual product, so traders need to rollover or replace the contracts in the funds. Witnesses testifying at recent Congressional hearings on oil market price volatility have expressed concern that this could be leading to intense, excessive speculation in oil and related commodities markets.
As Rep. Markey and Sen. Wyden note in the letter, “[a]t present, commodity index traders collectively comprise the single largest group of non-commercial participants in commodity markets. As speculators now dwarf commercial users in many markets, even possessing nearly 70 percent of contracts in the New York Mercantile Exchange futures market for West Texas Intermediate crude oil, commodity index traders may actually possess more oil positions than any other entity.”
The two Democrats ask Mr. Gensler to push forward on implementing financial reforms established by Dodd-Frank, like establishing position limits so single trading firms are not able to exact outsized influence on the markets. The lawmakers also suggest, however, that “the CFTC needs to supplement that rule with a new, separate rule that puts specific restrictions on the role that these commodities index funds play in our commodities markets” and to “consider whether such a rule should bar commodity index funds from participation in oil and other energy commodities markets, thereby ending this twenty-one year experiment by Wall Street in our commodities markets that appears to have been detrimental to the proper functioning of these markets.”