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>Handful of speculators dominate vast oil market >by David Cho - Aug. 21, 2008 12:00 AM > >Washington Post > >WASHINGTON - Regulators had long classified a private >Swiss energy conglomerate called Vitol as a trader >that primarily helped industrial firms that needed oil >to run their businesses. > >But when the Commodity Futures Trading Commission >examined Vitol's books last month, it found that the >firm was in fact more of a speculator, holding oil >contracts as a profit-making investment rather than a >means of lining up the actual delivery of fuel. > >Even more surprising to the commodities markets was >the massive size of Vitol's portfolio - at one point >in July, the firm held 11 percent of all the oil >contracts on the regulated New York Mercantile >Exchange. >The discovery revealed how an individual financial >player had gained enormous sway over the oil market >without the knowledge of regulators. Other CFTC data >showed that a significant amount of trading activity >was concentrated in the hands of just a few >speculators. > >The CFTC, which learned about the nature of Vitol's >activities only after making an unusual request for >data from the firm, now reports that financial firms >speculating for their clients or for themselves >account for about 81 percent of the oil contracts on >NYMEX, a far bigger share than had previously been >stated by the agency. > >Some lawmakers have blamed these firms for the >volatility of oil prices, including the tremendous >run-up that peaked earlier in the summer. > >"It is now evident that speculators in the energy >futures markets play a much larger role than >previously thought, and it is now even harder to >accept the agency's laughable assertion that excessive >speculation has not contributed to rising energy >prices," said Rep. John Dingell, D-Mich. He added that >it was "difficult to comprehend how the CFTC would >allow a trader" to acquire such a large oil inventory >"and not scrutinize this position any sooner." > >The CFTC, which refrains from naming specific traders >in its reports, did not publicly identify Vitol. > >The agency's report showed only the size of the >holdings of an unnamed trader. Vitol's identity as >that trader was confirmed by two industry sources with >direct knowledge of the matter. > >CFTC documents show Vitol was one of the most active >traders of oil on NYMEX as prices reached record >levels. By June 6, for instance, Vitol had acquired a >huge holding in oil contracts, betting prices would >rise. The contracts were equal to 57.7 million barrels >of oil - about three times the amount the United >States consumes daily. That day, the price of oil >spiked $11 to settle at $138.54. Oil prices eventually >peaked at $147.27 a barrel on July 11 before falling >back to settle at $114.98 Wednesday. > > >The biggest players on the commodity exchanges often >operate as "swap dealers" who primarily invest on >behalf of hedge funds, wealthy individuals and pension >funds, allowing these investors to enjoy returns >without having to buy an actual contract for oil or >other goods. Some dealers also manage commodity >trading for commercial firms. > >To build up the vast holdings this practice entails, >some swap dealers have maneuvered behind the scenes, >exploiting their political influence and gaps in >oversight to gain exemptions from regulatory limits >and permission to set up new, unregulated markets. >Many big traders are active not only on NYMEX but also >on private and overseas markets beyond the CFTC's >purview. These openings have given the firms nearly >unfettered access to the trading of vital goods, >including oil, cotton and corn. > >Using swap dealers as middlemen, investment funds have >poured into the commodity markets, raising their >holdings to $260 billion this year from $13 billion in >2003. During that same period, the price of crude oil >rose unabated every year. > >CFTC data show that at the end of July, just four swap >dealers held one-third of all NYMEX oil contracts that >bet prices would increase. Dealers make trades that >forecast prices will either rise or fall. Energy >analysts say these data are evidence of the >concentration of power in the markets. > >CFTC leaders have argued that speculators are not >influencing commodities' prices. > >Vitol released a statement that stated only that it >had not been contacted by the CFTC about the >reclassification of its business and that its trading >status remained unchanged.

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