NEW YORK — Federal regulators are planning their first major step to rein in oil speculators.
The Commodity Futures Trading Commission today will consider setting trade limits on the New York Mercantile Exchange to keep fund managers and other "speculative" investors from wielding too much influence in the market.
Speculators — investors who make money by trading oil contracts — have flooded the Nymex in recent years. They mostly bet that oil will get more expensive, leading many to believe that their presence in the market jacks up prices.
The limits proposed by the CFTC would cap how many contracts traders could buy. Violators likely would be told to get rid of especially large positions. The CFTC also has the power to issue fines and revoke trading privileges on the exchange.
Speculators got most of the blame when crude soared above $147 a barrel in 2008. But economists who studied commission data point out that exchange-traded funds and other investors have historically moved in the opposite direction of the market, selling when prices rise and buying contracts when prices fall.
CFTC Commissioner Bart Chilton said the commission should start slowly, keeping caps high enough that most exchange-traded funds and other speculative investments wouldn't immediately feel pressure to change their trading practices.
Eventually, he said, the CFTC could push the bar lower.
"Even if I'm not sure that these new speculators are contorting markets, if there's the hypothetical possibility, we're obligated to do something about it," Chilton said. "To do nothing would be irresponsible."
CFTC approval of trade limits today would be only a preliminary move. The commission will ask for public comment on the proposal before a final vote.
John Hyland, whose U.S. Oil Fund controls billions of dollars in energy contracts, said he doesn't know how trading limits would affect his business. If the government caps the number of contracts funds can buy, Hyland said managers like him would still trade as much as before.
They may get around the limits by moving some of their trading business to overseas exchanges and unregulated over-the-counter markets. Or they may simply split their funds into smaller ones that meet federal trade caps, Hyland said.
After a roller-coaster ride from the highs of 2008 to the lows of 2009, oil prices are again on the rise. They hit $83 a barrel this week, about twice the price they fetched last year even though the U.S. is using less petroleum. Prices eased off those highs on Wednesday.
Speculators are again getting blamed for boosting prices to levels not justified by global demand.
Many traders, however, say the rally started as an especially frigid winter boosted demand for heating oil. The developing world also has increased demand for fuel as economies like China's recover from the global recession.