The Big Story: Feds disclose investigation of crude-oil market

WASHINGTON, D.C.—Federal regulators are six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.

The Commodity Futures Trading Commission on Thursday said it started the probe in December and took the unusual step of publicizing it “because of today’s unprecedented market conditions.”

Crude prices have risen more than 42 percent since early December, even after a decline of more than $4 to $126.62 a barrel on the New York Mercantile Exchange. Gasoline prices are nearing a national average of $4 a gallon, up from about $3.20 a year ago.

The commission said details of the investigation remain confidential, but announced a handful of other initiatives designed to increase transparency of U.S. and international energy futures markets.

For example, the CFTC said it will immediately require monthly reports from institutional investors who manage funds designed to mimic the price of crude oil and other energy futures. The goal, the agency said, is to identify the amount of such index trading and to “ensure that this type of trading activity is not adversely impacting the price discovery process.”

The CFTC also said it has reached an agreement with its British counterpart and InterContinental Exchange Inc.’s Futures Europe to expand surveillance of energy futures contracts with U.S. delivery points, including the benchmark West Texas Intermediate crude, which trades on the Nymex.

“The implementation of today’s measures will improve oversight of the energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud,” the CFTC said in a statement.

Analysts said the CFTC action would likely have a limited impact on oil prices, which have risen on a combination of factors, including growing demand in China and other developed nations, the falling value of the dollar, geopolitical tensions and low interest rates, which have fueled a futures buying binge by institutional investors seeking to ride oil’s upward momentum.

It is the last factor, exacerbated by the Federal Reserve’s efforts to prop up the ailing housing market, that is playing the biggest role in the recent runup, according to Howard Simons, a strategist at Bianco Research in Chicago.

“Eliminate that excess money and the problem (of soaring prices) disappears,” he said.

Still, the CFTC action “will have a chilling effect” on speculative investors’ enthusiasm for energy futures, Simons predicted. “What they’re saying ... is, ‘You either stop this or we’re going to stop it for you.’”

At least one energy analyst sees trouble on the horizon for pension funds and other non-traditional investors looking to commodities indexes as just another type of security they need to have in their portfolios.

If a major price drop occurs, this relatively new breed of investors will want out of energy futures at the same time and it will be “like entering a revolving door at the wrong time in the wrong direction,” according to Cameron Hanover Inc. President Peter Beutel.