Testifying to the House Energy and Commerce Committee,
Michael Masters of Masters Capital Management said that the price of
oil would quickly drop closer to its marginal cost of around $65 to $75
a barrel, about half the current $135.
Fadel Gheit of
Oppenheimer & Co., Edward Krapels of Energy Security Analysis and
Roger Diwan of PFC Energy Consultants agreed with Masters'''' assessment
at a hearing on proposed legislation to limit speculation in futures
markets.
Krapels said that it wouldn''''t even take 30 days to
drive prices lower, as fund managers quickly liquidated their positions
in futures markets.
"Record oil
prices are inflated by speculation and not justified by market
fundamentals," according to Gheit. "Based on supply and demand
fundamentals, crude-oil prices should not be above $60 per barrel."
Futures trading in
London has not been a major factor in rising oil prices, testified Sir
Bob Reid, chairman of the Chairman of London-based ICE Futures Europe.
Rising prices are largely a function of fundamental supply and demand,
not manipulation or speculation, he said.
"Energy speculation has
become a growth industry and it is time for the government to
intervene," said Rep. John Dingell, D-Mich., chairman of the full
committee. "We need to consider a full range of options to counter this
rapacious speculation." It was Dingell''''s strongest statement yet on the
role of speculators.
Dingell introduced a bill on June 11 that would ask the
Energy Department to gather the facts on energy prices, including the
role played by speculators.
See full story.
There are two kinds of speculators in the futures markets, Masters
said. Traditional speculators are those who need to hedge because they
actually take physical possession of the commodities. Index
speculators, on the other hand, are merely allocating a portion of
their portfolio to commodity futures.
Index speculation damages price-discovery mechanisms provided by futures markets, Masters added
The committee will likely consider legislation that would rein in index
speculation by imposing higher-margin requirements; setting position
limits for speculators; requiring more disclosure of positions; and
preventing pension funds and investment banks from owning commodities.
Both major presidential
candidates have supported closing loopholes that encourage speculation
in the energy markets.
Read more on Election Blog.
However, other witnesses said that pure speculators have had little
impact on energy prices, which have doubled in the past year to about
$135 per barrel. Both Treasury Secretary Henry Paulson and Energy
Secretary Samuel Bodman have dismissed the impact of speculators on
prices paid by consumers.
Speculators now account
for about 70% of all benchmark crude trading on the New York Mercantile
Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman
of the investigations subcommittee. Stupak introduced a bill on Friday
that would limit index speculation.
There has been much
discussion recently about how big a role speculators have been playing
in the sharp rise in energy prices, though no consensus has emerged on
this point.
Congress, however, has
grown increasingly concerned over speculative investors'''' role in the
energy market in comparison with those buying futures contracts to
hedge against risk from price changes. Lawmakers are expected to
consider legislation to set strict limits -- or in some cases, an
outright ban -- on speculative trading in energy futures in some
markets.
Dingell is looking into
any legal loopholes that may have contributed to speculation in energy
markets. In 1991, according to documents provided by the Commodity
Futures Trading Commission to the committee''''s investigators, the agency
authorized the first exemption from position limits for swap dealers
with no physical commodity exposure. This began what Dingell said was
"a process that has enabled investment banks to accumulate enormous
positions in commodity markets."
Is Congress barking up the wrong tree?
Neal Ryan, manager at Ryan Oil & Gas Partners, said that if
Congress develops regulations to cut back speculative trading,
speculation will just find a new home.
"Speculation is the
root of capitalism," he said. "If the speculation is forced out of the
U.S. exchanges, it''''ll simply show up on other exchanges that are OTC
like the ICE, or new exchanges will pop up to allow for the spec trades
to continue functioning."
Ryan said he does see a
reason for Congress to look at eliminating aspects such as allowing
West Texas intermediate crude oil futures to trade on foreign markets
and the "Enron loophole," but "these exchanges are currently
functioning as they are supposed to in a free marketplace."
The creation of a
comprehensive U.S. energy policy that tackles issues of increasing
domestic supply and reining in consumer demand via conservation should
be Congress'''' focus, Ryan said. "Instead we''''re on bended knee begging
the Saudis to put more oil on the market and talking about shutting
down spec trades."
Rex Nutting is Washington bureau chief of MarketWatch.Michael
Kitchen is a copy editor for MarketWatch and is based in New York. Nate
Becker contributed to this report from San Francisco.
