American Gas Association Backs Proposed CFTC Limits on Energy Speculation

The American Gas Association, which represents 195 energy companies that serve 64 million customers, said today that speculation should be curbed in the markets for natural gas, crude oil and gasoline.

The Commodity Futures Trading Commission in January proposed limits that would cap the number of energy contracts a single trader could hold. The public comment period on the proposal ends today. The proposal followed hearings last year amid concerns that speculators drove oil prices to a record high of $147.27 a barrel in 2008.

“Price volatility, sudden increases in price in particular, present significant challenges for both consumers and the gas utilities that service them,” the association said in a statement to the commission today.

The commission is debating tighter limits in the regulated commodities market even as the U.S. Senate considers legislation that would expand the commission’s authority to the $605 trillion over-the-counter derivatives market. The commission proposal has drawn more than 1,000 letters of support from U.S. consumers, while some industry groups say position limits will chase business overseas and decrease liquidity.

Commission Chairman Gary Gensler has pushed for tighter rules on energy speculators, calling for strict limits on who is exempt from regulation. He has asked Congress for an extension of authority to the over-the-counter market, where traders can sidestep restrictions by buying unregulated, bilateral contracts.

Online Campaign

Americans for Financial Reform sponsored an online petition and letter-writing campaign in support of position limits and more than 1,000 people responded with letters to the commission.

“Wall Street’s speculative trading in oil not only hurts the economy, but hurts every American who pays excessive prices at the pump, for groceries, home heating oil and everything related to transportation,” Trudy Charboneau, a retired nurse who lives in Exeter, Rhode Island, said in a letter.

Charboneau’s home heating oil has become her single largest expense, she said in a telephone interview. In 2008, her heating bills doubled to $600 a month.

“It is a huge impact for me,” said Charboneau, 68. “I’m concerned because I felt like one of the issues that drove oil costs so high a couple of years ago was speculation.”

Fuel distributors and the American Feed Industry Association have also written to the commission to support the proposal.

Commodity Speculation

Speculation is a necessary part of the commodity markets, and there is no evidence that speculators caused record-high oil prices, or that position limits would prevent future price spikes, the Futures Industry Association said in a letter to the commission last month. The association opposes position limits, and said limits would harm the markets.

“Price manipulation corrodes the public interests in price discovery and hedging. It can never be tolerated,” the Futures Industry Association said in a letter sent to the commission last month. “But speculation is not manipulation.”

If approved by the CFTC, the so-called position limits would apply to physically settled and cash-settled futures in light, sweet crude oil, Henry Hub natural gas, and New York Harbor gasoline and No. 2 heating oil. The contracts are traded on the New York Mercantile Exchange and the Atlanta-based Intercontinental Exchange Inc.

Trading Limits

The commission proposed a cumulative, all-month limit that would cap traders at 10 percent of the open interest of the first 25,000 contracts and 2.5 percent of the open interest beyond 25,000. The single-month limit would be two-thirds of the aggregate cap. Limits in the spot month would hold investors to 25 percent of the open interest in the future for physical delivery.

A trader with spot month cash-settled contracts could hold five times as many contracts as long as they held no physically settled contracts in the spot month. There are different limits for small reporting markets and new markets. Limits would apply to individual exchanges, spot-month contracts, all-months contracts, and would include a cumulative cap that would apply across the U.S. exchanges.

Swaps dealers would no longer receive confidential hedge exemptions that allow them to exceed position limits, and instead would need “limited risk management exemptions” that would be reviewed monthly by the commission and made public after six months, the commission said.

To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net.

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