Oil Short Squeeze, Gain Prompt Calls to Curtail Speculators

By Tina Seeley

Sept. 23 (Bloomberg) -- U.S. lawmakers may seek to include commodity speculation limits in legislation designed to rescue banks from bad mortgage investments after a squeeze in oil trading sent crude to a record gain.

Crude oil for October delivery yesterday climbed more than $25 a barrel in New York Mercantile Exchange trading, before settling 16 percent higher at $120.92 as the contract expired. The fluctuation, the biggest since Nymex crude trading started in 1983, prompted the Commodity Futures Trading Commission to say it was ``closely monitoring'' prices for manipulation.

``I know for a fact that some members of Congress are working to include speculation legislation in the financial markets legislation,'' CFTC Commissioner Bart Chilton said yesterday in an e-mail. ``Those efforts, I think, may get fueled by the large spike in oil prices.''

Any move to include commodity limits in the legislation to rescue Wall Street risks encountering opposition from the administration and delaying the law. President George W. Bush called on Congress not to load the $700 billion legislative rescue plan with ``unrelated provisions.''

Oil soared yesterday as traders who had sold the October contract had to buy the futures back on the last day of trading, rather than try to make delivery from inventories that had declined in the wake of Hurricane Ike. Oil for November delivery rose just 6.4 percent to $109.37 yesterday.

The House of Representatives approved legislation last week aimed at curbing speculation in commodities after prices of oil, copper and corn reached records. The Senate has failed to hold a final vote on legislation that would give the commission authority to rein in hedge funds, securities firms and pension funds.

`Relevant' Action

``As Congress prepares a proposal to restore public confidence in financial markets, giving CFTC the authority it needs would be a relevant and important set of provisions, which should be included,'' Senator Tom Harkin, an Iowa Democrat and chairman of the Senate Agriculture Committee, said in an e-mail yesterday.

``The administration is pushing a narrow proposal focused mainly on residential mortgages, however, so it is not clear what the prospects may be for including anti-speculation provisions,'' Harkin said in an e-mail yesterday.

While the administration is asking Congress to move swiftly on the mortgage proposal, the measure is already encountering hurdles, after House Financial Services Committee Chairman Barney Frank said the plan must include limits on executive pay. Treasury Secretary Henry Paulson rejected the idea over the weekend, suggesting it would dissuade companies from taking advantage of the law.

Senate Majority Leader Harry Reid is ``not sure at this point'' whether anti-speculation measures will be included in the bailout bill, Rodell Mollineau, a spokesman for the senator, said in an e-mail yesterday.

Oil Soars

Oil reached $130 a barrel yesterday, 44 percent more than six days earlier, when it fell as low as $90.51. Gasoline futures gained 4 percent yesterday to about $2.70 a gallon on the Nymex.

CFTC staff will ``scour'' yesterday's oil trades in search of any illegal activity, Stephen Obie, acting director of the commission's division of enforcement said in a statement. ``No one should be trying to game our nation's commodity futures markets.''

There is ``likely to be a renewed interest in taking some action in light of this price movement,'' said Geoffrey Aronow, former director of enforcement at the agency and now a partner with Bingham McCutcheon LLP in Washington. The price swing yesterday wasn't ``automatically a cause for suspicion,'' he said.

The Nymex declined to comment on whether it was investigating yesterday's trades.

Anti-speculation language ``absolutely should be included because otherwise, the guys who are getting bailed out are going to have free reign over these commodity markets,'' said Michael Masters, of hedge fund Masters Capital Management.

`Cut Off the Heads'

Masters has testified to Congress four times this year that financial-market participants are responsible for doubling the price of oil. He estimates oil should be $65 to $70 a barrel.

``You can't curb short selling and then leave commodities unregulated,'' Masters said in a telephone interview yesterday. ``It's like a hydra, you can't just cut off one head, you've got to cut off all the heads.''

Hedge funds and other large speculators amassed commodities in the first half of the year, and prices peaked July 3. Since then, the Reuters/Jefferies CRB Index of 19 raw materials tumbled more than 20 percent. So-called net-long positions, or bets prices will rise, in 17 of its 19 members dropped 72 percent since July 1 to 241,370 contracts on Sept. 16, data from the CFTC in Washington show.

Impediment to Law

Adding anti-speculation legislation to the financial rescue bill ``could be disastrous for its odds,'' Kevin Book, senior energy analyst with Freidman Billings Ramsey & Co. Inc. in Arlington, Virginia, said in a telephone interview. ``At the same time this is the type of issue that really gets people's attention.''

To contact the reporter on this story: Tina Seeley in Washington at tseeley@bloomberg.net.