U.S. Senator Seeks Curb on Oil Speculation

NEW YORK-(Financial Times)--Political pressure to combat speculation in oil markets increased on Tuesday as a senior U.S. senator called for restrictions on pension funds and other big institutional investors investing in energy and farming commodities.

The proposal is one of three put forward yesterday by Joseph Lieberman, a Democratic-turned-independent senator from Connecticut. It is the latest in a series of calls for tougher regulation, amid growing U.S. worries over food and fuel costs.

Politicians fear that traders might be exploiting the more lightly regulated London oil and oil-futures markets – via the “London loophole” – to trade in a way that might be artificially boosting prices. An act to close that loophole was proposed by five U.S. senators last week.

Many politicians attach much of the blame to financial investors, including pension funds, which have poured billions of dollars into the futures market in recent years, largely through commodity indices. The two leading presidential candidates, Barack Obama and John McCain, have also weighed in, pledging to propose remedies to rein in market speculation.

On Tuesday, Mr Lieberman, a close ally of Mr McCain, said he was “persuaded” that speculators were a “significant contributing factor to the economic distress now being felt by American consumers every time they stand in the grocery store checkout line or pay for a fill-up at the gas pump”.

Amid growing political pressure, the Commodity Futures Trading Commission, the chief futures regulator, imposed limits last week on the size of speculative positions that could be taken out on London’s ICE Futures Europe exchange. About 15 per cent of futures trading on the benchmark West Texas Intermediate oil contract takes place there.

The limits would bring oversight of traders’ behaviour on the London ex-change in line with oversight on domestic markets.

Yet that is unlikely to stop legislators who are considering proposals to extend U.S. regulation over the “London loophole” or to close it.

Despite seven congressional hearings into “excessive speculation” in the past three months, there is little agreement on whether speculation is causing food and energy price inflation. The commodities regulator has repeatedly said that fundamental supply and demand factors are mainly behind the recent price movements – though it is stepping up its focus on the potential impact of speculators and commodity index traders.

Some observers say lawmakers have not explained how speculators or pension funds are boosting commodity prices or why the price of raw materials such as iron ore, rice or coal – in which speculators have limited access – are also booming.

On Tuesday, William Quinn, chairman of the Committee on the Investment of Employee Benefit Assets, which represents 110 of the largest U.S. pension funds, told senators that pension funds were long term investors – not speculators.

“We are deeply concerned about the prospect of any legislation that would bar pension plans from investing in certain types of assets,” he said.