Last Updated : 14 January 2010 at 10:45 IST

CFTC to set trade limits to keep speculators away

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WASHINGTON (Commodity Online) : US Commodity Futures Trading Commission on Thursday will consider setting trade limits on the New York Mercantile Exchange to keep speculators from wielding too much influence in the market.

As a first step, Federal regulators are planning their first major step to rein in oil speculators. Whether it's enough to control future spikes in energy prices remains to be seen.

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Speculators have flooded the Nymex in recent years. They mostly bet that oil will get more expensive, leading many to believe that their presence in the market jacks up prices.

The limits proposed by the CFTC would cap how many contracts traders could buy. Violators likely would be told to get rid of especially large positions. The CFTC also has the power to issue fines and revoke trading privileges on the exchange.

Speculators got most of the blame when crude soared above $147 a barrel in 2008. But economists who studied commission data point out that exchange-traded funds and other investors have historically moved in the opposite direction of the market, selling when prices rise and buying contracts when prices fall.

CFTC said the commission should start slowly, keeping caps high enough that most exchange-traded funds and other speculative investments wouldn't immediately feel pressure to change their trading practices.

CFTC approval of trade limits Thursday will be only a preliminary move. The commission will ask for public comment on the proposal before a final vote.

After a roller-coaster ride from the highs of 2008 to the lows of 2009, oil prices are again on the rise. They hit $83 a barrel this week, about twice the price they fetched last year even though the U.S. is using less petroleum. Prices eased off those highs on Wednesday.

Speculators are again getting blamed for boosting prices to levels not justified by global demand.

Many traders, however, say the rally started as an especially frigid winter boosted demand for heating oil. The developing world also has increased demand for fuel as economies like China's recover from the global recession.