London and Dubai’s energy trading markets will come under the spotlight in Washington this week as Congress holds a hearing into market manipulation and the scope of US oversight of crude oil and other energy markets.
The development is a sign that some top US Democrats are turning their attention to foreign markets where benchmark US energy contacts are traded in their hunt for signs that speculators could be partly to blame for record oil prices.
Tomorrow the US Senate’s commerce committee holds a hearing – at which billionaire investor George Soros will testify – into “energy market manipulation and federal enforcement regimes”.
Senator Carl Levin, a Michigan Democrat who has led efforts to tighten US federal oversight on over-the-counter energy derivatives, last week welcomed news that the Commodity Futures Trading Commission, the US futures watchdog, was six months into a nationwide probe into the oil markets.
He said one of the problems affecting strong market oversight was US regulators being “kept in the dark” about oil trades done in the London market – which he refers to as “the London Loophole”.
A version of the West Texas Intermediate oil futures contract traded on the New York Mercantile Exchange is also offered in London on ICE Futures Europe, the UK platform of Atlanta-based InterContinental Exchange.
It is regulated by the Financial Services Authority, which has a less enforcement-driven approach to pursuing price manipulation than the CFTC, which oversees Nymex and ICE’s US-based markets.
However, last week a decision by the CFTC and FSA to share more information on daily oil and energy trading data was welcomed by Mr Levin. He said it would “go a long way” towards closing the London Loophole.
Calls for tighter scrutiny of activity in non-US markets by lawmakers are unlikely to end soon. Last week, the Dubai Gold and Commodities Exchange launched its own version of the WTI contract, as well as a rival version of the Brent crude contract normally traded in London on ICE.
Both Mr Levin and senator Dianne Feinstein of California last month introduced the Oil Trading and Transparency Act, which aims to ensure that energy derivatives traded on foreign exchanges using trading terminals in the US are “subject to the same speculative trading limits and reporting requirements as energy commodities traded on US exchanges”.
The CFTC echoes the views of oil traders by believing that speculation is not behind record oil price – although it is continuing to study the issue.