In an open letter to CFTC chair Gary Gensler, Congressman Jeff Bingaman requested more information on price formation in the oil market. Specifically, the Senator wanted to know how the CFTC “interprets recent oil market price movement, and whether CFTC believes that those movements are responding primarily to developments in oil production and consumption, or whether prices are primarily being influenced by other factors,” like perhaps speculation. Gensler and the CFTC have been accused in the past of not doing enough to curb speculation or fight manipulation.

Bingaman pointed out that while the Middle East, and oil-rich Libya in particular, has been in turmoil for months, there has been no significant decline in the available oil supply. However, rather than leveling out, the oil futures market has remained incredibly unstable. His question implies an answer left unsaid: certainly these prices do not reflect fears about supply, but rather are signs that the market is rife with speculators.

He requested the following information from Chairman Gensler:

• How CFTC prevents major market participants, which are invested in both physical and financial aspects of the marketplace, from “talking their books.”
  • Within large banks, is there a legal firewall between commodities research groups and trading desks?
  • How is any firewall between research and trading enforced?
  • How would CFTC know if that firewall were breached?
  • What would the penalty for such a breach be?

• To what extent major market makers, such as large banks, have incentive to exacerbate existing volatility in the market place.
  • Does CFTC track and assess sources of market volatility?
  • How does CFTC explain the increase in oil price volatility in recent years?

• How increased margin calls across the commodities complex has affected price formation in each of the commodities.
  • Why did the price of oil fall, in association with the fall in the price of silver, after margins were dramatically increased for silver in early May 2011?
  • How does CFTC explain the Energy Information Administration’s finding that the price of oil is now more strongly correlated with other non-energy commodity prices than it is with other energy prices, such as the price for natural gas?
  • What would be the expected outcome of increased margin call in the oil market?

The senator requested a response by July 1. Gensler has made no response yet, but with oil hovering near $100 a barrel and gas at $4 a gallon, the CFTC Chairman can hardly be surprised. Last month Gensler found himself in a similar situation, and would not give details on how he planned to handle the speculative crisis or when position limit rules on oil would be finalized.  However, the CFTC has been taking aim at oil price manipulation, charging Arcadia Petroleum and its affiliates with manipulation back in 2008.

Read more about this letter.
photo credit: Orange County Archives