The CFTC is focusing on the swap market, which is currently for the most part unregulated in comparison to the exchanges (see Financial Times article). Currently, swap dealers receive exemptions for speculative positions limits that may apply to other speculators in the commodities markets. In essence, swaps are private contracts between investment banks and investors that allow for exposure to commodity prices without investing directly in the futures that backed the assets. This does allows one to take a speculative position without posting the same margin or abiding by the same position limits that one would encounter on a futures exchange such as the Nymex. A CFTC survey found that of the 550 clients of swap dealers, at least 18 were above the exchange limits as a result of using swaps. Closing this path, or at least imposing the same limits, would put these traders more in-line with current exchange requirements. Whether this curbs speculation to a noticeable degree, beyond affecting the 18 or so mentioned clients, will have to be seen.

The Inspector General for the Commodity Futures Trading Commission (CFTF) has begun to investigate an earlier report on the commodity markets (see Reuters article). At question is the CFTC's role in an inter-agency task force report that came to the conclusion that supply-and-demand and not speculation was responsible for the increase in energy prices. Since the report came to a conclusion that some in Congress did not like, and came at a time that was a few days ahead of a Senate vote on the bill, various senators, including some on the Energy and Natural Resources Committee, allege that: "the CFTC knowingly included "seriously flawed" data and the timing was "suspicious." Interesting. The Senate is debating an important issue, a major regulator provides a report and data in a timely manner, and yet the reaction is to question the timing of the report because it came to a conclusion that did not support their initial assertions. Of course, none of this is surprising, and the report may in fact be flawed, but you have to wonder whether if they had come to another conclusion if an investigation would be occurring. Of course, usually when action is finally taken, it often is too late. Maybe this is just another indication that crude oil prices have indeed peaked, Gustav notwithstanding.

The Washington Post is reporting that sovereign wealth funds are becoming some of the largest commodity speculators. While the CFTC recently told Congress that its internal monitoring did not show influence by SWFs, it is believed by some that the CFTC may not be detecting their influence since the SWFs are working through swap dealers, which are often unregulated and operate through investment banks such as Goldman Sachs, Morgan Stanley, and Lehman Brothers. Officials have requested additional data from swap dealers, with these finding expected in September. It is believed that many of the foreign funds are coming from countries less familiar to SWF investing, such as Norway, Singapore, Kuwait, Australia, Russia, Libya, and even Iran. Estimates believe such funds represented 12 percent or more of investment bank commodity activity. The collective value of such funds is estimated at more than $2 trillion and is expected to increase 5-fold by 2012.

The NY Times has an article regarding the preliminary results of a task force study headed by the Commodity Futures Trading Commission, along with staff from the departments of Agriculture and Energy, Treasury, the Federal Reserve, the FTC, and the SEC. While some will argue with the composition and motivations of the task force group, the study found that speculators were not responsible for driving crude oil prices higher. As an example of their findings, swap dealers who provide investors a future return tied to commodity market performance were nearly balanced between purchases and sales of energy futures contracts. In fact, from January to May of 2008, more of these swap positions were selling than buying, even while oil prices rose 28% during the same period. Furthermore, the task force found that speculators were more likely to change their positions after prices had moved, and not before, suggesting they were responding to new information as is typical in an efficient market. The compete report is due in September, but the initial findings are interesting nonetheless.

As mentioned in recent WSJ and Bloomberg articles, the Commodity Futures Trading Commission is conducting an investigation into potential crude oil price manipulation. What is interesting about the story is not only how the CFTC is initiating an investigation, but that they are making a formal announcement of what they are doing, an indirect indication that they are also aware of the public and political outrage given higher energy costs. The CFTC commissioner said it best:

"It's important that people who are paying high gas prices understand the CFTC is on the case and that we're closely monitoring and in this instance deeply investigating any potential abuse in this important energy market"

I guess we will have to wait and see if the investigation uncovers anything of interest, or if it is simply being used to keep regulators and Congress at bay until energy prices hopefully retreat to more "normal" levels (or the public gets used to current prices, which is doubtful).

In addition to reporting about the investigation, the WSJ article does highlight some potential abuses, including using the Platts price-reporting system to manipulate prices. Essentially, traders could issue numerous orders during the window of time that Platts uses for setting the prices that it reports to subscribers. This artificially high or low price could then be used to profit in other markets by taking an opposite position based on the move in reported prices. Another potential manipulation includes spreading false information about oil tankers being either empty or full, sending the wrong impression about supply, and thereby affecting price. Whether either of these potential abuses (if true) could be classified as wide-spread speculation, and thereby causing a larger scale lasting move toward higher energy prices, is yet to be determined.

When considering potential abuses it is important to remember that a company can actually take advantage of insider information regarding its own production and demand when it makes trades, either for hedging or for increasing/decreasing its own position. Since insider information is not technically illegal in the same way it is with equities, this forces regulators to work a little harder to prove that traders were intentionally trying to create an artificial price in order to profit from speculation. Something tells me that this aspect will either be ignored or put into question as some look for validation of out-of-control speculation abuses.