WASHINGTON – Senator Chuck Grassley today asked Commodities Futures Trading Commission Acting Chairman Walt Lukken to answer several questions on the roles that speculators are playing in the unprecedented increase in crude oil prices. The Commodities Futures Trading Commission regulates the futures and option markets in the United States.
"I've been hearing a lot of talk about the role that speculators are having on the price of crude oil. Record high prices, with similar market fundamentals of a year ago, would certainly lead people to question what exactly is going on," Grassley said. "The CFTC has an obligation to ensure that there is no fraud, over speculation or market manipulation in the oil market."
Here’s a copy of the text of Grassley’s letter to Lukken.
June 10, 2008
Mr. Walter L. Lukken
Acting Chairman
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Dear Acting Chairman Lukken:
Crude oil today is trading nearly twice what it was just a year ago. Yet, many of the factors affecting oil have been largely unchanged during this time. The fundamentals underlying the oil market are relatively unchanged from a year ago. The weak dollar, little spare production capacity, growing global demands from emerging markets, and political volatility in producing countries all play essentially the same role today as they did when crude oil was $75 a barrel. It seems clear that at $135 a barrel, the crude oil futures market is no longer based on the fundamental supply and demand of the underlying commodity.
The difference today, some argue, is the role of speculators like hedge funds, pension and index funds and Wall Street investment banks who are not currently subject to speculation limits. Some analysts say as much as a third of the current price for crude oil could be a speculative premium. In addition, the trading of energy futures contracts on foreign boards of trade have also been linked to the enormous speculation in crude oil.
I’m pleased to hear that the CFTC intends to convene an Energy Markets Advisory Committee meeting later today. I also view the new agreement with the United Kingdom’s Financial Services Authority (FSA) and ICE Futures Europe in London as a positive step. While these are critical initial steps, I encourage the CFTC to continue to pursue policies to guarantee the integrity and ensure proper oversight of futures markets.
I therefore request your response to the following questions. What actions does the CFTC believe should be taken in order to limit the speculative trading of investment banks, pension funds, and index funds in commodity markets? Should action be taken to limit the speculative trades made by participants with no interest in the underlying commodity? Is the CFTC reviewing the existing policy to exempt swaps transactions from speculative trading limits? Why would removing such exemptions not reduce the amount of speculative trades made by participants with no interest in the underlying commodity?
With regard to oversight and transparency of energy trading on foreign boards of trade, does the CFTC view the recent agreement with the FSA as sufficient to ensure that energy futures markets reflect the fundamental value of the commodity? Will the increased information-sharing provide all the necessary data to ensure that the trading of WTI crude contracts in the UK are free from fraud and manipulation? Has the CFTC considered revoking the “no action” letters issued in 1999 that allow trading of WTI crude contracts in foreign exchanges? There has been congressional testimony that revoking these policies would reduce the amount of speculative trades in WTI crude. Please respond to this point. What further steps is the CFTC prepared to take to ensure full oversight and transparency of foreign energy exchanges?
I look forward to hearing your responses to these questions as well as the questions I submitted during the consideration of your nomination before the Senate Agriculture Committee. Thank you in advance for your timely response.
Sincerely,
Charles E. Grassley
United States Senator
cc: Commissioner Barton Chilton