http://www.marketwatch.com/news/story/gas-could-fall-2-if/story.aspx?guid={2673C102-68E0-41D9-9C9A-10EE2E723948}
Gas could fall to $2 if Congress acts, analysts say
Limiting speculation would push prices to fundamental level, lawmakers
told
By Rex Nutting & Michael Kitchen, MarketWatch
Last update: 4:24 p.m. EDT June 23, 2008
WA****NGTON (MarketWatch) -- The price of retail gasoline could fall by
half, to around $2 a gallon, within 30 days of passage of a law to
limit speculation in energy-futures markets, four energy analysts told
Congress on Monday.
Testifying to the House Energy and Commerce Committee, Michael Masters
of Masters Capital Management said that the price of oil would quickly
drop closer to its marginal cost of around $65 to $75 a barrel, about
half the current $135.
Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security
Analysis and Roger Diwan of PFC Energy Consultants agreed with
Masters' *****sment at a hearing on proposed legislation to limit
speculation in futures markets.
Krapels said that it wouldn't even take 30 days to drive prices lower,
as fund managers quickly liquidated their positions in futures
markets.
"Record oil prices are inflated by speculation and not justified by
market fundamentals," according to Gheit. "Based on supply and demand
fundamentals, crude-oil prices should not be above $60 per barrel."
Futures trading in London has not been a major factor in rising oil
prices, testified Sir Bob Reid, chairman of the Chairman of
London-based ICE Futures Europe. Rising prices are largely a function
of fundamental supply and demand, not manipulation or speculation, he
said.
"Energy speculation has become a growth industry and it is time for
the government to intervene," said Rep. John Dingell, D-Mich.,
chairman of the full committee. "We need to consider a full range of
options to counter this rapacious speculation." It was Dingell's
strongest statement yet on the role of speculators.
There has been much discussion recently about how big a role
speculators have been playing in the sharp rise in energy prices,
though no consensus has emerged on this point.
Dingell introduced a bill on June 11 that would ask the Energy
Department to gather the facts on energy prices, including the role
played by speculators. See full story.
There are two kinds of speculators in the futures markets, Masters
said. Traditional speculators are those who need to hedge because they
actually take physical possession of the commodities. Index
speculators, on the other hand, are merely allocating a ****tion of
their ****tfolio to commodity futures.
Index speculation damages price-discovery mechanisms provided by
futures markets, Masters added
The committee will likely consider legislation that would rein in
index speculation by imposing higher-margin requirements; setting
position limits for speculators; requiring more disclosure of
positions; and preventing pension funds and investment banks from
owning commodities.
Both major presidential candidates have sup****ted closing loopholes
that encourage speculation in the energy markets. Read more on
Election Blog.
However, other witnesses said that pure speculators have had little
impact on energy prices, which have doubled in the past year to about
$135 per barrel. Both Treasury Secretary Henry Paulson and Energy
Secretary Samuel Bodman have dismissed the impact of speculators on
prices paid by consumers.
Speculators now account for about 70% of all benchmark crude trading
on the New York Mercantile Exchange, up from 37% in 2000, said Rep.
Bart Stupak, D-Mich., chairman of the investigations subcommittee.
Stupak introduced a bill on Friday that would limit index speculation.
There has been much discussion recently about how big a role
speculators have been playing in the sharp rise in energy prices,
though no consensus has emerged on this point.
Congress, however, has grown increasingly concerned over speculative
investors' role in the energy market in comparison with those buying
futures contracts to hedge against risk from price changes. Lawmakers
are expected to consider legislation to set strict limits -- or in
some cases, an outright ban -- on speculative trading in energy
futures in some markets.
Dingell is looking into any legal loopholes that may have contributed
to speculation in energy markets. In 1991, according to do***ents
provided by the Commodity Futures Trading Commission to the
committee's investigators, the agency authorized the first exemption
from position limits for swap dealers with no physical commodity
exposure. This began what Dingell said was "a process that has enabled
investment banks to ac***ulate enormous positions in commodity
markets."
Is Congress barking up the wrong tree?
Neal Ryan, manager at Ryan Oil & Gas Partners, said that if Congress
develops regulations to cut back speculative trading, speculation will
just find a new home.
"Speculation is the root of capitalism," he said. "If the speculation
is forced out of the U.S. exchanges, it'll simply show up on other
exchanges that are OTC like the ICE, or new exchanges will pop up to
allow for the spec trades to continue functioning."
Ryan said he does see a reason for Congress to look at eliminating
aspects such as allowing West Texas intermediate crude oil futures to
trade on foreign markets and the "Enron loophole," but "these
exchanges are currently functioning as they are supposed to in a free
marketplace."
The creation of a comprehensive U.S. energy policy that tackles issues
of increasing domestic supply and reining in consumer demand via
conservation should be Congress' focus, Ryan said. "Instead we're on
bended knee begging the Saudis to put more oil on the market and
talking about shutting down spec trades." End of Story
Rex Nutting is Wa****ngton bureau chief of MarketWatch.
Michael Kitchen is a copy editor for MarketWatch and is based in New
York. Nate Becker contributed to this re****t from San Francisco.
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