HIT THE SPECULATORS AND OIL BETS ARE OFF / THE WALL STREET JOURNAL

HEARD ON THE STREET

JULY 8, 2009.

Hit the Speculators and Oil Bets Are Off

By LIAM DENNING

Blame is the ultimate commodity. There is infinite supply, it costs nothing to deploy but the price can be astronomical.

The Commodity Futures Trading Commission's proposed crackdown on speculation in oil and natural gas, announced Tuesday, comes at an odd time. After all, the CFTC was largely dismissive about the impact of speculators on energy prices last fall, when crude still hovered around $100 a barrel. In the past week, Nymex crude has dropped 10% to about $63, in response to fears about the slow pace of economic recovery.

There is a strong argument to make that given the weak demand outlook and overflowing oil inventories, prices should be even lower. But market prices are set by competing "fundamental" views. There is a clear division between those who see economic "green shoots" and those who see weeds, just as there are "peak oil" aficionados set against less pessimistic opponents.

Since oil is storable, there isn't any reason why someone anticipating shortages shouldn't elect to pay a higher price. Indeed, it is rich that elements in Washington should still blame speculators for stronger oil prices. Last year's price spike was likely exacerbated by energy officials filling the Strategic Petroleum Reserve despite a squeeze in supply. Today, quantitative easing encourages the view that commodities are a better store of value than the dollar.

Imposing limits on speculative positions carries all sorts of problems, not least having government-appointed officials decide who is a genuine "hedger" and who isn't. It is an unpalatable fact of life that markets are occasionally prone to overshooting or undershooting. But if the alternative is to suppress liquidity structurally, the result is likely to be higher volatility. Participants seeking to hedge their risk might find themselves unable to do so efficiently. That carries a big cost for everyone.

One welcome element in Tuesday's announcement was that CFTC hearings will be held in July and August. Given the growing sense that economic recovery won't help energy prices stage another rapid increase, a summer lull in prices might restrain any rash moves.

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