Congress To Investigate Speculation In Crude Oil

Posted by Bull Bear Trader | 5/12/2008 05:50:00 PM | , , , | 0 comments »

Reuters and other outlets are reporting that a House of Representatives committee has started considering opening up a formal investigation into energy market speculation. Hedge funds and investment banks are expected to take the most blame during the investigations. Word is that some representatives are discussing the possibility of changing the margin requirements for crude oil and other energy commodities as a way to curb speculation. As with most things Congress gets involved in, the best we can often hope for is that they consider the unintended consequences of any new laws and/or regulation. Even something as simple as raising margin requirements would have the effect of reducing the amount of leverage available to speculators, causing some to move to greener pastures, but it could also have the unintended consequence of making it more costly for companies that truly need to hedge their energy cost exposure. Not only would higher margins potentially tie up more capital for these companies, keeping it from being deployed for more useful purposes, but the increase could also have a negative effect on liquidity - after all, someone needs to take the other side of the trade. It is true that speculators can overtake and artificially drive a market, but they are also necessary to help provide a market for those looking to take a hedging position. As price fluctuations increase, margin requirements should reflect sustained increases in volatility. Nonetheless, simply increasing margin requirements in a hope to eliminate speculation may do nothing more than drive out those who need the market the most.