U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

1

28–640

" SENATE ! 109th Congress 

2nd Session 

S. PRT. 

2006

109–65

THE ROLE OF MARKET SPECULATION IN 

RISING OIL AND GAS PRICES: A NEED 

TO PUT THE COP BACK ON THE BEAT

STAFF REPORT

PREPARED BY THE

PERMANENT SUBCOMMITTEE ON 

INVESTIGATIONS

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

JUNE 27, 2006


congress.#13
(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

NORM COLEMAN, Minnesota, Chairman 

TED STEVENS, Alaska 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

RAYMOND V. SHEPHERD, III, Staff Director and Chief Counsel 

LELAND B. ERICKSON, Counsel 

ELISE J. BEAN, Minority Staff Director and Chief Counsel 

DAN M. BERKOVITZ, Minority Counsel 

MARY D. ROBERTSON, Chief Clerk 

(III)

C O N T E N T S 

Page

I. EXECUTIVE SUMMARY ................................................................................. 1

II. FINDINGS AND RECOMMENDATIONS ................................................... 6

A. Findings ........................................................................................................ 6

1. Rise in Speculation ................................................................................. 6

2. Speculation Has Increased Prices ......................................................... 6

3. Price-Inventory Relationship Altered ................................................... 7

4. Large Trader Reports Essential ............................................................ 7

5. ICE Impact on Energy Prices ................................................................ 7

B. Recommendations ........................................................................................ 7

1. Eliminate Enron Loophole ..................................................................... 7

2. Require Large Trader Reports .............................................................. 7

3. Monitor U.S. Energy Trades on Foreign Exchanges ........................... 7

4. Increase U.S.-U.K. Cooperation ............................................................ 7

5. Make ICE Determination ...................................................................... 7

III. RECENT TRENDS IN ENERGY MARKETS ............................................ 8

A. Increasing Prices .......................................................................................... 8

B. Increasing Amounts of Crude Oil in Storage ............................................ 12

C. Increased Speculation in Energy Commodities ......................................... 16

1. Increased Investments in Energy Commodities .................................. 16

2. The Effect of Speculation on Prices ...................................................... 17

3. Large Profits from Speculation in Energy Commodities ..................... 23

IV. NO COP ON THE BEAT FOR OVER-THE-COUNTER ENERGY 

MARKETS ........................................................................................................... 28

A. Development of OTC Electronic Markets .................................................. 29

B. No Oversight of OTC Electronic Markets .................................................. 32

C. No Large Trader Reporting in OTC Electronic Markets .......................... 35

D. No Public Dissemination of Trading Data by OTC Electronic Markets . 37

V. THE COP’S BLIND EYE: U.S. ENERGY TRADES ON FOREIGN 

EXCHANGES ...................................................................................................... 40

A. U.S. Energy Commodities Traded on Foreign Exchanges ........................ 40

B. ICE Futures Trading of U.S. Energy Commodities .................................. 41

C. Implications for Oversight of U.S. Commodity Markets .......................... 42

APPENDIX: MEASURING THE INCREASE IN SPECULATIVE TRADING ....................................................................................................................... 44

A. CFTC Commitment of Traders Report ....................................................... 44

B. Increased Speculative Trading on the NYMEX ........................................ 45

C. Increased Speculative Trading on ICE ...................................................... 48

(1)

1See, e.g., Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, U.S. Strategic Petroleum Reserve: Recent Policy Has Increased Costs to Consumers But Not Overall U.S. 

Energy Security, S. Prt. 108–18 (March 5, 2003); Majority Staff, U.S. Senate Permanent Subcommittee on Investigations, Gas Prices: How Are They Really Set?, reprinted in Gas Prices: 

How Are They Really Set, Hearings before the U.S. Senate Permanent Subcommittee on Investigations (S. Hrg. 107–509) (April 30 and May 2, 2002), at p. 322; U.S. General Accounting Office, Effects of Mergers and Market Concentration in the U.S. Petroleum Industry, Report to the 

Ranking Minority Member, U.S. Senate Permanent Subcommittee on Investigations, GAO–04–

96 (May 2004); Volatility in the Natural Gas Market: The Impact of High Natural Gas Prices 

on American Consumers, Hearing before the U.S. Senate Permanent Subcommittee on Investigations (S. Hrg. 109–398) (February 13, 2006). 

THE ROLE OF MARKET SPECULATION IN RISING OIL AND GAS PRICES: A NEED TO PUT 

THE COP BACK ON THE BEAT 

I. EXECUTIVE SUMMARY 

For the past 5 years, the U.S. Senate Permanent Subcommittee 

on Investigations has conducted a number of investigations into the 

pricing of energy commodities, including gasoline, crude oil, and 

natural gas.1 These investigations reflect a continuing concern over 

the sustained increases in the price and price volatility of these essential commodities, and, in light of these increases, the adequacy 

of governmental oversight of the markets that set these prices. 

Over the past 6 years, crude oil, gasoline, and natural gas prices have risen significantly. Crude oil has risen from a range of $25–

$30 per barrel in 2000, to a range of $60–$75 per barrel in 2006. 

High crude oil prices are a major reason for the record or nearrecord highs of the prices of a variety of petroleum products, including gasoline, heating oil, diesel fuel, and jet fuel. The average 

price for a gallon of regular unleaded gasoline has jumped from 

$1.46 per gallon in 2000 to $2.36 per gallon over the past 12 

months, with peaks at $3.14 per gallon in September 2005, and 

$2.93 per gallon in May 2006. Rising crude oil prices have helped 

push up natural gas prices as well: the price of natural gas has 

risen from $2–$3 per million BTU (British Thermal Unit) in 2000 

to a typical range of $6–$8 per million BTU during the past year. 

The traditional forces of supply and demand cannot fully account 

for these increases. While global demand for oil has been increasing—led by the rapid industrialization of China, growth in India, 

and a continued increase in appetite for refined petroleum products, particularly gasoline, in the United States—global oil supplies 

have increased by an even greater amount. As a result, global inventories have increased as well. Today, U.S. oil inventories are at 

an 8-year high, and OECD oil inventories are at a 20-year high. Accordingly, factors other than basic supply and demand must be examined. For example, political instability and hostility to the 

United States in key producer countries, such as Nigeria, VenVerDate 0ct 09 2002 09:54 Aug 01, 2006 Jkt 028640 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\DOCS\28640.TXT SAFFAIRS PsN: PAT
2

2See, e.g., Statement of Daniel Yergin, World Crude Oil Pricing, Hearing before the U.S. 

House of Representatives Committee on Energy and Commerce, May 4, 2006. 

ezuela, Iraq, and Iran, threaten the security and reliability of these 

supplies. Furthermore, in each of the past 2 years hurricanes have 

disrupted U.S. oil and gas production in the Gulf of Mexico. As 

Saudi Arabia has increased its rate of production to meet increasing demand, its ability to pump additional oil in the event of a 

shortfall has declined, thereby providing less of a cushion in the 

event of a supply disruption. It is often asserted that these fears 

over the adequacy of supply have built a ‘‘risk premium’’ into crude 

oil prices.2

In addition, over the past few years, large financial institutions, 

hedge funds, pension funds, and other investment funds have been 

pouring billions of dollars into the energy commodities markets—

perhaps as much as $60 billion in the regulated U.S. oil futures 

market alone—to try to take advantage of price changes or to 

hedge against them. Because much of this additional investment 

has come from financial institutions and investment funds that do 

not use the commodity as part of their business, it is defined as 

‘‘speculation’’ by the Commodity Futures Trading Commission 

(CFTC). According to the CFTC, a speculator ‘‘does not produce or 

use the commodity, but risks his or her own capital trading futures 

in that commodity in hopes of making a profit on price changes.’’ 

Reports indicate that, in the past couple of years, some speculators 

have made tens and perhaps hundreds of millions of dollars in 

profits trading in energy commodities. This speculative trading has 

occurred both on the regulated New York Mercantile Exchange 

(NYMEX) and on the over-the-counter (OTC) markets. 

The large purchases of crude oil futures contracts by speculators 

have, in effect, created an additional demand for oil, driving up the 

price of oil to be delivered in the future in the same manner that 

additional demand for the immediate delivery of a physical barrel 

of oil drives up the price on the spot market. As far as the market 

is concerned, the demand for a barrel of oil that results from the 

purchase of a futures contract by a speculator is just as real as the 

demand for a barrel that results from the purchase of a futures 

contract by a refiner or other user of petroleum. 

Although it is difficult to quantify the effect of speculation on 

prices, there is substantial evidence that the large amount of speculation in the current market has significantly increased prices. 

Several analysts have estimated that speculative purchases of oil 

futures have added as much as $20–$25 per barrel to the current 

price of crude oil, thereby pushing up the price of oil from $50 to 

approximately $70 per barrel. Additionally, by purchasing large 

numbers of futures contracts, and thereby pushing up futures 

prices to even higher levels than current prices, speculators have 

provided a financial incentive for oil companies to buy even more 

oil and place it in storage. A refiner will purchase extra oil today, 

even if it costs $70 per barrel, if the futures price is even higher. 

As a result, over the past 2 years, crude oil inventories have been 

steadily growing, resulting in U.S. crude oil inventories that are 

now higher than at any time in the previous 8 years. The last time 

crude oil inventories were this high, in May 1998—at about 347 

3

3Statement of Alan Greenspan, Oil Depends on Economic Risks, Hearing before the Committee on Foreign Relations, U.S. Senate, June 7, 2006. 4 Id.

5 Id.

6 7 U.S.C. § 5(b), 

7 7 U.S.C. § 6a(a). 

8 Id.

9 Id.

million barrels—the price of crude oil was about $15 per barrel. By 

contrast, the price of crude oil is now about $70 per barrel. The 

large influx of speculative investment into oil futures has led to a 

situation where we have high crude oil prices despite high levels 

of oil in inventory. 

As former Federal Reserve Chairman Alan Greenspan recently 

explained in testimony before the Congress, over the past few years 

‘‘there has been a major upsurge in over-the-counter trading of oil 

futures and other commodity derivatives.’’ 3 Hedge funds and other 

institutional investors have accumulated ‘‘substantial net long positions in crude oil futures, largely in the over-the-counter market.’’ 4

According to Mr. Greenspan, these futures positions have created 

an additional demand for oil for future delivery, and ‘‘with the demand from the investment community, oil prices have moved up 

sooner than they would have otherwise.’’ Mr. Greenspan states 

these price increases have stimulated additional oil production, a 

large increase in oil inventories, and a partial scale-back of consumption.5

In general, speculative trading brings greater liquidity to the futures market, so that companies seeking to hedge their exposure to 

commodity prices can find counterparties willing to take on those 

price risks. Speculative purchases of futures contracts can also, in 

effect, finance the production and storage of the underlying commodity to meet future demand. On the other hand, large speculative buying or selling of futures contracts can distort the market 

signals regarding supply and demand in the physical market or 

lead to excessive price volatility, either of which can cause a cascade of consequences detrimental to the overall economy. 

A key responsibility of the CFTC is to ensure that prices on the 

futures market reflect the laws of supply and demand rather than 

manipulative practices 6 or excessive speculation.7 The Commodity 

Exchange Act (CEA) states, ‘‘Excessive speculation in any commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and 

unnecessary burden on interstate commerce in such commodity.’’ 8

The CEA directs the CFTC to establish such trading limits ‘‘as the 

Commission finds are necessary to diminish, eliminate, or prevent 

such burden.’’ 9

At the same time that there has been a huge influx of speculative dollars in energy commodities, the CFTC’s ability to monitor 

the nature, extent, and effect of this speculation has been diminishing. Most significantly, there has been an explosion of trading 

of U.S. energy commodities on exchanges that are not regulated by 

the CFTC. Available data on the nature and extent of this speculation is limited, so it is not possible for anyone, including the CFTC, 

4

10 Robert J. Shiller, Irrational Exuberance (Princeton University Press, 2000), at p. 5. 11 Id., at pp. 203–204. 

to make a final determination about the current level of speculation. 

In Irrational Exuberance, which forecasted the collapse of stock 

market prices in 2000–2001, Professor Robert Shiller wrote of the 

importance of understanding the role of speculation in setting market prices. ‘‘We need to know confidently whether the increase that 

brought us here is indeed a speculative bubble—an unsustainable 

increase in prices brought on by investors’’ buying behavior rather 

than by genuine, fundamental information about value. In short, 

we need to know if the value investors have imputed to the market 

is not really there, so that we can readjust our planning and thinking.’’ 10

To a certain extent, whether any level of speculation is ‘‘excessive’’ lies within the eye of the beholder. In the absence of data, 

however, it is impossible to begin the analysis or engage in an informed debate over whether our energy markets are functioning 

properly or are in the midst of a speculative bubble. Again, Professor Shiller has warned, ‘‘It is a serious mistake for public figures 

to acquiesce in the stock market valuations we have seen recently, 

to remain silent about the implications of such high valuations, and 

to leave all commentary to the market analysts. . . . The valuation 

of the stock market is an important national—indeed international 

issue.’’ 11 This advice would appear to be as relevant to the energy 

markets as to the stock market. 

Until recently, U.S. energy futures were traded exclusively on 

regulated exchanges within the United States, like the NYMEX, 

which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or 

fraud. In recent years, however, there has been a tremendous 

growth in the trading of contracts that look and are structured just 

like futures contracts, but which are traded on unregulated OTC 

electronic markets. Because of their similarity to futures contracts 

they are often called ‘‘futures look-alikes.’’ The only practical difference between futures look-alike contracts and futures contracts 

is that the look-alikes are traded in unregulated markets whereas 

futures are traded on regulated exchanges. The trading of energy 

commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest 

of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th 

Congress. 

The impact on market oversight has been substantial. NYMEX 

traders, for example, are required to keep records of all trades and 

report large trades to the CFTC. These Large Trader Reports 

(LTR), together with daily trading data providing price and volume 

information, are the CFTC’s primary tools to gauge the extent of 

speculation in the markets and to detect, prevent, and prosecute 

price manipulation. CFTC Chairman Reuben Jeffery recently stated: ‘‘The Commission’s Large Trader information system is one of 

the cornerstones of our surveillance program and enables detection 

5

12Letter from Reuben Jeffery III, Chairman, Commodity Futures Trading Commission, to 

Michigan Governor Jennifer Granholm, August 22, 2005. 

of concentrated and coordinated positions that might be used by 

one or more traders to attempt manipulation.’’ 12

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep 

records or file Large Trader Reports with the CFTC, and these 

trades are exempt from routine CFTC oversight. In contrast to 

trades conducted on regulated futures exchanges, there is no limit 

on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (‘‘open interest’’) at the end of each day. 

The CFTC’s ability to monitor the U.S. energy commodity markets was further eroded when, in January of this year, the CFTC 

permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in 

the United States for the trading of U.S. crude oil futures on the 

ICE futures exchange in London—called ‘‘ICE Futures.’’ Previously, 

the ICE Futures exchange in London had traded only in European 

energy commodities—Brent crude oil and United Kingdom natural 

gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the United Kingdom Financial Services Authority. In 1999, the London exchange obtained the CFTC’s 

permission to install computer terminals in the United States to 

permit traders here to trade European energy commodities through 

that exchange. 

Then, in January of this year, ICE Futures in London began 

trading a futures contract for West Texas Intermediate (WTI) crude 

oil, a type of crude oil that is produced and delivered in the United 

States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the 

United States to trade its new WTI contract on the ICE Futures 

London exchange. Beginning in April, ICE Futures similarly allowed traders in the United States to trade U.S. gasoline and heating oil futures on the ICE Futures exchange in London. 

Despite the use by U.S. traders of trading terminals within the 

United States to trade U.S. oil, gasoline, and heating oil futures 

contracts, the CFTC has not asserted any jurisdiction over the 

trading of these contracts. Persons within the United States seeking to trade key U.S. energy commodities—U.S. crude oil, gasoline, 

and heating oil futures—now can avoid all U.S. market oversight 

or reporting requirements by routing their trades through the ICE 

Futures exchange in London instead of the NYMEX in New York. 

As an increasing number of U.S. energy trades occurs on unregulated, OTC electronic exchanges or through foreign exchanges, the 

CFTC’s large trading reporting system becomes less and less accurate, the trading data becomes less and less useful, and its market 

oversight program becomes less comprehensive. The absence of 

large trader information from the electronic exchanges makes it 

more difficult for the CFTC to monitor speculative activity and to 

6

13 Enron’s manipulation of prices on its unregulated electronic trading platform demonstrates 

the widespread economic harm that may result from abuses in unregulated markets. In 2002, 

for example, the Federal Energy Regulatory Commission (FERC) found that 174 trades between 

Enron and one other party in the last hour of trading in Enron’s electronic market on January 

31, 2001, resulted in a steep increase in the price of natural gas on that date. The report tentatively concluded that Enron OnLine price data was susceptible to price manipulation and may 

have affected not only Enron trades, but also increased natural gas prices industrywide. See, 

e.g., August 2002 report prepared by the FERC staff, Docket No. PA–02–000. 

detect and prevent price manipulation.13 The absence of this information not only obscures the CFTC’s view of that portion of the 

energy commodity markets, but it also degrades the quality of information that is reported. A trader may take a position on an unregulated electronic exchange or on a foreign exchange that is 

either in addition to or opposite from the positions the trader has 

taken on the NYMEX, and thereby avoid and distort the large trader reporting system. Not only can the CFTC be misled by these 

trading practices, but these trading practices could render the 

CFTC weekly publication of energy market trading data, intended 

to be used by the public, as incomplete and misleading. 

It is critical for U.S. policymakers, analysts, regulators, investors 

and the public to understand the true reasons for skyrocketing energy prices. If price increases are due to supply and demand imbalances, economic policies can be developed to encourage investments 

in new energy sources and conservation of existing supplies. If 

price increases are due to geopolitical factors in producer countries, 

foreign policies can be developed to mitigate those factors. If price 

increases are due to hurricane damage, investments to protect producing and refining facilities from natural disasters may become a 

priority. To the extent that energy prices are the result of market 

manipulation or excessive speculation, only a cop on the beat with 

both oversight and enforcement authority will be effective. 

Extending the CFTC’s Large Trader Reporting system to require 

all U.S. traders of energy futures or futures-like contracts to keep 

records and report large trades to the CFTC, regardless of where 

the trade takes place—on the NYMEX, on an unregulated OTC 

electronic exchange, or on a foreign exchange—will eliminate the 

gaps in large trader reporting requirements. This action is necessary to preserve the CFTC’s ability to oversee energy futures 

markets in order to detect and prevent price manipulation and excessive speculation. 

II. FINDINGS AND RECOMMENDATIONS 

Based upon its investigation into the role of market speculation 

in rising oil and gas prices, the Subcommittee staff makes the following findings and recommendations. 

A. Findings 

1. Rise in Speculation. Over the past few years speculators 

have expended tens of billions of dollars in U.S. energy commodity 

markets.

2. Speculation Has Increased Prices. Speculation has contributed to rising U.S. energy prices, but gaps in available market data 

currently impede analysis of the specific amount of speculation, the 

commodity trades involved, the markets affected, and the extent of 

price impacts.

7

3. Price-Inventory Relationship Altered. With respect to 

crude oil, the influx of speculative dollars appears to have altered 

the historical relationship between price and inventory, leading the 

current oil market to be characterized by both large inventories 

and high prices.

4. Large Trader Reports Essential. CFTC access to daily reports of large trades of energy commodities is essential to its ability 

to detect and deter price manipulation. The CFTC’s ability to detect and deter energy price manipulation is suffering from critical 

information gaps, because traders on OTC electronic exchanges and 

the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.

5. ICE Impact on Energy Prices. ICE’s filings with the Securities and Exchange Commission and other evidence indicate that its 

over-the-counter electronic exchange performs a price discovery 

function—and thereby affects U.S. energy prices—in the cash market for the energy commodities traded on that exchange. 

B. Recommendations 

1. Eliminate Enron Loophole. Congress should eliminate the 

Enron loophole that currently limits CFTC oversight of key U.S. 

energy commodity markets and put the CFTC back on the beat policing these markets.

2. Require Large Trader Reports. Congress should enact legislation to provide that persons trading energy futures ‘‘look-alike’’ 

contracts on over-the-counter electronic exchanges are subject to 

the CFTC’s large trader reporting requirements.

3. Monitor U.S. Energy Trades on Foreign Exchanges. Congress should enact legislation to ensure that U.S. persons trading 

U.S. energy commodities on foreign exchanges are subject to the 

CFTC’s large trader reporting requirements.

4. Increase U.S.-U.K. Cooperation. The CFTC should work 

with the United Kingdom Financial Services Authority to ensure it 

has information about all large trades in U.S. energy commodities 

on the ICE Futures exchange in London.

5. Make ICE Determination. The CFTC should immediately 

conduct the hearing required by its regulations to examine the 

price discovery function of the ICE OTC electronic exchange and 

the need for ICE to publish daily trading data as required by the 

Commodity Exchange Act.

8

14Melanie Feisst, ‘‘Joseph was a speculator too,’’ Hedge funds draw on the Bible to defend 

themselves against accusations that they have destablised the markets, The Daily Telegraph, 

U.K., May 6, 2006. 15 Engergy Pricing and Profits, Joint Hearing before the Senate Committee on Commerce, 

Science and Transportation and the Senate Committee and Energy and Natural Resources, November 9, 2005. 

III. RECENT TRENDS IN ENERGY MARKETS 

‘‘There has been no shortage and inventories of crude oil and 

products have continued to rise. The increase in prices has not been 

driven by supply and demand.’’ 

—Lord Browne, Group Chief Executive of BP 14

‘‘Senator, the facts are—and I’ve said this publicly for a long 

time—the oil prices have been moving steadily up for the last 2 

years. And I think I have been very clear in saying that I don’t 

think that the fundamentals of supply and demand—at least as we 

have traditionally looked at it—have supported the price structure 

that’s there.’’

—Lee Raymond, Chairman and CEO, ExxonMobil 15

A. Increasing Prices 

In what has become an all-too-familiar refrain over the past several years, energy prices have recently reached record highs. Oil 

prices in the spring of 2006 surpassed the record highs reached last 

summer in the days after Hurricane Katrina rampaged through the 

Gulf of Mexico and shut down over a million barrels per day of U.S. 

oil production. Figure 1 shows the steep climb and recent record 

highs in crude oil prices.

Figure 1. Since January 2002, crude oil prices have steadily risen; oil prices 

reached record high levels in spring of 2006. Prices reflect spot month NYMEX 

futures contract prices. Data source: U.S. Department of Energy, Energy Information Administration (EIA), NYMEX data.


28640.001
9

Because gasoline and other petroleum-based energy commodities 

are produced by refining crude oil, the rising price of crude oil has 

been a major cause of rising gasoline and petroleum product prices. 

Figure 2 illustrates how U.S. gasoline prices have increased in recent years.

Figure 2. The average price of gasoline in the United States has risen from an 

average of $1.10 cents per gallon in the late 1990s to an average of over $2.20 

per gallon over the past 12 months, and nearly $3 per gallon in the spring of 

2006. Prices reflect the weekly average retail price for all grades of gasoline. Data 

source: EIA.

Natural gas prices also have jumped higher over the past several 

years. Because several industries, such as electric power generation, can use natural gas as a substitute for crude oil, and vice 

versa, natural gas prices are significantly affected by crude oil 

prices. Natural gas prices also are highly correlated with the prices 

of several petroleum products, such as diesel fuel and heating oil. 

Figure 3 illustrates the recent rise in natural gas prices.


28640.002
10

16See, e.g., U.S. Department of Energy, Energy Information Administration (EIA), Short-Term 

Energy Outlook and Summer Fuels Outlook, April 2006 (2006 Summer Fuels Outlook), at pp. 

2–3; Jeffrey H. Birnbaum and Steven Mufson, Cost of Gas Puts Pressure on GOP, The Washington Post, April 25, 2006; BBC News, What is driving oil prices so high?, http://news.bbc.co.uk/

go/pr/fr/-/1/hi/business/4922172.stm (April 20, 2006); Peg Mackey and Janet McBride, Reuters, 

Oil’s top brass talk prices at summit, Saturday, April 22, 2006, 9:33 a.m.; Steven Mufson, The 

Battle Over the Blame for Gas Prices, The Washington Post, Friday, April 21, 2006, at p. A01. 17See, e.g., Philip K. Verleger, Jr., A Primer on Oil Prices: I, The Petroleum Economics Monthly, December 2005; International Energy Agency (IEA), Oil Market Report, May 12, 2006, at p. 

3. 18For example, from 2002 through 2005 global demand increased from 77.8 to 83.6 million 

barrels per day (bpd), while global supply increased from 76.9 to 84 million bpd. This represents 

an increase in demand of 5.8 million bpd, and an increase in supply of 7.1 million bpd. As a 

result, OECD inventories grew by 300,000 bpd in 2003 and 200,000 bpd in 2004 and 2005. Id., 

at p. 43. 

Figure 3. Natural gas prices have risen from an average of $2 per million BTU 

in the late 1990s to a current range of $6–$8 per million BTU in the spring of 

2006. At times, price spikes have doubled the price of natural gas. Prices reflect 

spot month NYMEX futures contract prices. Data source: EIA, NYMEX data.

A number of factors are often cited as contributing to these increasing prices.16 Generally, the rising prices are attributed to an 

increasingly precarious balance between supply and demand. Global demand for oil has been increasing, led by the rapid industrialization of China, growth in India, and a continued increase in appetite for refined products, particularly gasoline, in the United 

States.17 Although supplies have been increasing to keep pace with 

this increased demand, 18 these supplies are perceived to be increasingly vulnerable to disruption. Political instability and hostility to U.S. interests in the key producer countries of Iran, Iraq, 


28640.003
11

19Monte Reel, Chavez Stokes Confrontation Over U.S. Role in Venezuela, The Washington 

Post, July 19, 2005. 20See, e.g., Matt Piotrowski, Nigerian Shut-Ins Fail to Stimulate Oversupplied US Cash Crude 

Market, Oil Daily, March 6, 2006. This spring, however, despite several well-publicized disruptions to Nigerian supplies, no shortfalls resulted. ‘‘ ‘Physical traders have taken the Nigerian 

outage totally in stride,’ [one trader] said. ‘Without the Nigerian troubles, there would be even 

more oversupply.’ ’’ Id. 21 Between August 26, 2005 and April 19, 2006, the cumulative loss of production in the Gulf 

of Mexico due to Hurricane Katrina was approximately 149 million barrels, or approximately 

1 million barrels per day (bpd). U.S. Department of Interior Materials and Management Service 

(MMS), Hurricane Katrina/Hurricane Rita, Evacuation and Production Shut-in Statistics Report, 

Wednesday, April 19, 2006, at http://www.mms.gov/ooc/press0419.htm. Nearly 90 percent of total 

Gulf of Mexico oil production, which normally is about 1.5 million bpd, was shut down in the 

first few days after landfall on August 29; nearly 56 percent, or about 840,000 bpd, was still 

shut-in (i.e., unable to be produced) on September 15, 2 weeks after landfall. U.S. Department 

of Energy, Office of Electricity Delivery and Energy Reliability, Energy Assurance Daily, September 15, 2005, at pp. 2–3. 

In the 6-month period between September 11, 2004 and February 14, 2005, Hurricane Ivan 

caused a cumulative loss of nearly 44 million barrels of crude oil production in the Gulf of Mexico, which was equivalent to about 7.2 percent of the annual production of oil in the Gulf. MMS, 

Hurricane Ivan Evacuation and Production Shut-in Statistics as of Monday, February 14, 2005, 

Final Report, at http://www.mms.gov/ooc/press/2005/press0214.htm. 

The International Energy Agency (IEA) states that ‘‘random events,’’ such as accidents, 

labor unrest, ‘‘guerilla activity,’’ unplanned maintenance, and weather-related events, including 

hurricanes in North America, ‘‘may cause supply losses of between 300 kb/d [thousand barrels 

per day] and 400 kb/d for non-OPEC supply each year.’’ IEA, Oil Market Report, May 12, 2006, 

at p. 14. 22 2006 Summer Fuels Outlook, at p. 3. On the other hand, government-controlled strategic 

stocks, including the U.S. Strategic Petroleum Reserve, are at historically high levels. 2006 

Summer Fuels Outlook, Summer Fuel Charts, at p.3 and at Summer Fuel Charts, p. 9; IEA, 

Oil Market Report, March 14, 2006, at p. 59. In the event of a disruption in supply, these strategic stocks can be just as effective as using spare production capacity to make up for production 

shortfalls. For example, in 2005, the United States released 30 million barrels of oil from the 

U.S. Strategic Petroleum Reserve, and other IEA members released another 30 million barrels 

to compensate for the loss of production caused by Hurricanes Katrina and Rita. H. Josef 

Hebert, Nations to Release 60M Barrels of Oil, Gas, Associated Press Financial Wire, September 

2, 2005, 10:51 p.m. GMT. In 2003, Saudi Arabia and other OPEC members increased their production to compensate for the temporary loss of about 1.7 million barrels per day of Iraq oil 

due to the American invasion. David Ivanovich, OPEC strives to prevent world oil-supply shortage, Houston Chronicle, March 10, 2003; Producers Expect Minimal War Diruption, Oil Daily, 

March 19, 2003. 23See, e.g., Daniel Yergin, Testimony Before the U.S. House of Representatives Committee on 

Energy and Commerce, May 4, 2006, at www.cera.com/news (last visited May 22, 2006). 24 CFTC, The Economic Purpose of Futures Markets, at http://www.cftc.gov/opa/brochures/

opaeconpurp. htm. 

Venezuela, 19 and Nigeria 20 are among the most frequently cited 

threats to supplies. Additionally, in each of the past 2 years hurricanes have disrupted U.S. oil and gas production in the Gulf of 

Mexico.21 As Saudi Arabia has increased its rate of production to 

meet increasing demand, its ability to pump additional oil in the 

event of a shortfall elsewhere has declined, thereby providing less 

of a cushion in the event of such a supply disruption.22 It is often 

asserted that these and other fears over the adequacy of supply 

have built a ‘‘risk premium’’ into crude oil prices.23

These factors, however, do not tell the whole story. Concurrent 

with the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge 

against them. Most of this additional investment has not come 

from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC 

defines a speculator as a person who ‘‘does not produce or use the 

commodity, but risks his or her own capital trading futures in that 

commodity in hopes of making a profit on price changes.’’ 24 Reports 

indicate that in the past year a few speculators have made tens 

12

25See Section III.C.3 in this report, below. 26 As explained in two previous reports issued by the Subcommittee staff, U.S. gasoline prices 

are also influenced by the overall gasoline supply and demand balance within the U.S. gasoline 

market, which in turn depends on a variety of other factors, including the profitability of refinery operations, domestic refinery capacity and availability, the level of imports, competition 

within the industry at the national and local level, and fuel specifications resulting from environmental requirements that affect the fungibility of gasoline supplies. This year, uncertainty 

within the market regarding whether there would be an adequate supply of gasoline blended 

with ethanol to replace the supply of gasoline blended with MTBE also contributed to some of 

the increases in gasoline prices. 27See, e.g., Falling oil prices would help stem rise in copper prices: trader, Platts Metals Week, 

May 19, 2006, at http://www.platts.com/Metals/highlights/2006/mp—mw—051906.xml (last visited May 26, 2006). 28 Bhusan Bahree and Ann Davis, Oil Settles Above $70 a Barrel, Despite Inventories at 8-Year 

High, The Wall Street Journal, April 18, 2006.

and perhaps hundreds of millions of dollars trading in oil and 

gas.25

The large purchases of crude oil futures contracts by speculators 

have, in effect, created an additional demand for oil, driving up the 

price of oil for future delivery in the same manner that additional 

demand for contracts for the delivery of a physical barrel today 

drives up the price for oil on the spot market. As far as the market 

is concerned, the demand for a barrel of oil that results from the 

purchase of a futures contract by a speculator is just as real as the 

demand for a barrel that results from the purchase of a futures 

contract by a refiner or other user of petroleum. 

Although it is difficult to quantify the effect of speculation on 

prices, there is substantial evidence supporting the conclusion that 

the large amount of speculation in the current market has significantly increased prices; several analysts have estimated that speculative purchases of oil futures have added as much as $20–$25 per 

barrel to the current price of crude oil. Additionally, by purchasing 

large numbers of futures contracts, and thereby pushing up futures 

prices to even higher levels than current prices, speculators have 

provided a financial incentive for oil companies to buy even more 

oil and place it in storage. A refiner will purchase extra oil today, 

even if it costs $70 per barrel, if the futures price is even higher. 

As a result, over the past 2 years, crude oil inventories have been 

steadily growing, resulting in U.S. crude oil inventories that are 

now higher than at any time in the previous 8 years. The last time 

crude oil inventories were this high, in May 1998—at about 347 

million barrels—the price of crude oil was about $15 per barrel. By 

contrast, the price of crude oil today is about $70 per barrel. The 

large influx of speculative investment into oil futures has led to a 

situation where we have both high supplies of crude oil and high 

crude oil prices. 

High crude oil prices are a major reason for the record or nearrecord highs of the prices of a variety of petroleum products, including gasoline, heating oil, diesel fuel, and jet fuel.26 There also 

is evidence that the skyrocketing prices of metal commodities can 

partially be attributed to these skyrocketing oil prices.27

B. Increasing Amounts of Crude Oil in Storage

‘‘What’s been happening since 2004 is very high prices without 

record-low stocks. The relationship between U.S. [oil] inventory levels and prices has been shredded, has become irrelevant.’’ 

—Jan Stuart, Global Oil Economist, UBS Securities 28

13

29 2006 Summer Fuels Outlook, at p. 3. 30 IEA, Oil Market Report, March 14, 2006, at p. 3. See also, 2006 Summer Fuels Outlook, at 

p. 3. 31 EIA, Energy Assurance Daily, May 4, 2006. The EIA reported the current spare capacity 

to be between 1 and 1.5 million barrels per day (bpd). Id. The International Energy Agency reports the spare capacity at 1.7 million bpd. IEA, Oil Market Report, May 12, 2006, at p. 14. 

Compelling evidence that the oft-cited geopolitical, economic, and 

natural factors do not fully explain the recent rise in energy prices 

can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, 

so have supplies. As Figure 4 indicates, over the past couple of 

years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have 

exceeded demand.29

Figure 4. In 2004 and 2005 the supply of crude oil exceeded demand. Data source: EIA, International Petroleum Monthly, March 2006.

Projections for the future indicate that, for the near term, supply 

will continue to keep pace with demand. In its monthly report for 

March 2006, the International Energy Agency (IEA), stated, ‘‘Additions to OPEC and non-OPEC capacity are forecast to keep global 

supply trends broadly in line with global demand in 2007 and 

2008.’’ 30 The U.S. Department of Energy’s Energy Information Administration (EIA) recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 

and 5 million barrels per day by 2010, thereby ‘‘substantially thickening the surplus capacity cushion.’’ 31

Because supplies have been rising along with demand, commercial crude oil inventories have been rising as well. As can be seen 

in Figure 5, the amount of crude oil in U.S. commercial inventories 


28640.004
14

32 2006 Summer Fuels Outlook, at Table 3. In Europe, crude oil in inventories also were higher 

in 2005 than in either 2003 or 2004. IEA, Oil Market Report, March 14, 2006, at p. 29. Not 

only are the absolute levels of U.S. and European inventories above average, inventories are also 

higher when measured by days-of-supply those inventories could provide at current consumption 

levels. Id. In June, the IEA reported that OECD crude stocks had risen to their highest level 

in 20 years. IEA, Oil Market Report Highlights, June 13, 2006. 33 EIA, Short-Term Energy Outlook and Summer Fuels Outlook, April 2006, Summer Fuel 

Charts, at p.11. 34 2006 Summer Fuels Outlook, at Table 3. In mid-May of this year, however, natural gas spot 

month futures fell below $6 per million BTU. 

is higher today than at any other time in the current decade. The 

EIA forecasts that U.S. inventories will increase again in 2006.32

Figure 5. The amount of crude oil in storage in commercial inventories has risen 

to higher-than-average levels over the past year. Data source: EIA.

The amount of natural gas in storage also has been increasing 

over the past couple of years. From mid-2004 to the present, except 

for the period shortly following the landfall of Hurricane Katrina, 

the amount of natural gas in storage has exceeded the previous 5-

year average.33 Yet during this entire period natural gas prices 

were higher than the previous 5-year average. These trends are expected to continue. Despite a projected increase in the amount of 

natural gas available in storage for next winter, the EIA states 

that ‘‘concerns about potential future supply tightness and continuing pressure from high oil markets are keeping expected spot 

natural gas prices for the next heating season at high levels.’’ 34

Figure 6 shows the relationship between U.S. crude oil inventories and prices over the past 8 years, and how the relationship 

between physical supply and price has fundamentally changed 

since 2004. For the period from 1998 through 2003, the chart 


28640.005
15

35Philip Verleger, Commodity Investors: A Stabilizing Force?, The Petroleum Economics 

Monthly, March 2006. 

shows that the price-inventory relationship generally centered 

around a line sloping from the middle-left of the chart down to the 

lower right, meaning that low inventories were accompanied by 

high prices, and high inventories were accompanied by low prices. 

For 2004, 2005, and through May 2006, which is the most recently 

available data, the inventory-price relationships fall nowhere near 

this downward sloping line; if anything, the points seem to go in 

the opposite direction, such that higher inventories seem to be correlated with higher prices. Figure 6 clearly indicates that there has 

been a fundamental change in the oil industry, such that the previous relationship between price and inventory no longer applies.

Figure 6. Since 2004, crude oil prices have risen as inventories have risen. Data 

source: EIA.

As will be discussed in the next section, one reason underlying 

this change is the influx of billions of dollars of speculative investment in the crude oil and natural gas futures markets. As energy 

prices have not only increased but become more volatile, energy 

commodities have become an attractive investment for financial institutions, hedge funds, pension funds, commodity pools, and other 

large investors. One oil economist has calculated that over the past 

few years more than $60 billion has been spent on oil futures in 

the NYMEX market alone.35 As explained below, this frenzy of 

speculative buying has created additional demand for oil futures, 

thereby pushing up the price of those futures. The increases in the 


28640.006
16

36Some traders contend that the high inventories have lowered spot prices. ‘‘The physical mar- ket is pretty relaxed,’’ one trader said this spring, as prices rose over $60 per barrel. ‘‘There’s 

been downward pressure on WTI [West Texas Intermediate] because of inventories.’’ Matt 

Piotrowski, Nigerian Shut-Ins Fail to Stimulate Oversupplied US Cash Crude Market, Oil Daily, 

March 6, 2006. ‘‘What the high stock levels are doing, along with unsold spot cargoes and storage capacity constraints, is driving down the spot and front month prices relative to the outer 

months. In effect, a chunk of the fear premium is being taken out of the market.’’ Receding Fear 

Premium, Petroleum Intelligence Weekly, March 13, 2006. 

On the other hand, by creating a financial incentive to purchase oil for storage, the steep rise 

in futures prices may also have stimulated current demand, thereby pushing up current prices. 

Although some of this increased demand for oil—for present consumption plus for future consumption—has been met by increase in supply, any increase in production necessary to meet 

this additional demand has come at a time of low excess global excess production capacity. The 

recent decline in global excess production capacity has been one of the major factors supporting 

current price levels. See, e.g., Verleger, A Primer on Oil Prices: I, at p. 22. (‘‘This process of inventory building [due to speculative purchases of futures contracts] reduces the supply of certain 

crudes and products available to the current spot market when current supply cannot be increased, as has been the case in 2005. This promotion of inventory holding raises current spot 

prices.’’). 

Using the IEA estimate of 1.7 million bpd for OPEC’s surplus production capacity, an amount 

of oil equivalent to between 10 and 15 percent of OPEC’s surplus capacity has been placed into 

commercial inventories. It is not apparent why these increases in commercial inventories, together with the high level of strategic reserves in OECD countries, including the U.S. Strategic 

Petroleum Reserve, have not had a greater effect in alleviating the ‘‘fear premium’’ regarding 

potential supply disruptions. 37 International Research Center for Energy and Economic Development, 2005. 38 Alexei Barrionuevo and Simon Romero, Energy Trading, Without a Certain ‘‘E’’, The New 

York Times, January 15, 2006. 39Michael R. Sesit, Commodities Enter Investment Mainstream, Pension Funds, Universities 

Jump Into the Asset Class; High Returns, Low Risk, Wall Street Journal, September 9, 2004; 

Philip Verleger, Commodity Investors: A Stabilizing Force?, The Petroleum Economics Monthly, 

March 2006. The most frequently cited research papers are Thomas Schneeweis, Georgi 

Georgiev, The Benefits of Managed Futures, June 10, 2002; and Gary Gorton and K. Geert 

Rouwenhorst, Facts and Fantasies about Commodity Futures, Yale International Center for Finance, Working Paper No. 04–20, June 14, 2004. 

price of oil futures have provided financial incentives for companies 

to buy even more oil and put it into storage for future use, resulting in high prices despite ample inventories.36

C. Increased Speculation in Energy Commodities 

‘‘Ironically, hedge funds trading oil are not doing anything very 

different than the large investment banks such as Goldman Sachs, 

Bank of America, or Morgan Stanley already do. The proprietary 

trading desks of these and other large investment banks are actually 

‘‘hedge funds in drag,’’ just as Enron was.’’

—Peter C. Fusaro and Gary M. Vasey, Hedge Funds 

Change Energy Trading 37

1. Increased Investments in Energy Commodities

At the same time energy commodity prices have been increasing, 

there has been a large increase in the amount of money expended 

on energy commodities futures and other derivative instruments. 

‘‘Volatile energy markets and record-high commodity prices are 

prompting renewed interest from investors eager to play in the sector,’’ The New York Times reported earlier this year. ‘‘That has 

pushed banks and a growing number of hedge funds to hire more 

energy traders and brainy quantitative minds to back their bets on 

energy prices.’’ 38 Recent academic research indicating that commodity futures have performed as well as stocks and better than 

bonds, with less risk, also has boosted expenditures on energy commodity futures.39

Because the over-the-counter energy markets are unregulated, 

there are no precise or reliable figures as to the total dollar value 

of recent spending on investments in energy commodities, but the 

17

40Pelin Berkma, Sam Ouliaris, and Hossein Samiei, The Structure of the Oil Market and 

Causes of High Prices, International Monetary Fund, September 21, 2005. 41 Alexei Barrionuevo, Energy Trading, Without a Certain ‘‘E’’, The New York Times, January 

15, 2006 (citing Mr. Peter Fusaro of the Energy Hedge Fund Center). 42 Jad Mouawad and Heather Timmons, Trading Frenzy Adding to Rise in Price of Oil, The 

New York Times, April 29, 2006. 43Philip Verleger, Commodity Investors: A Stabilizing Force?, The Petroleum Economics 

Monthly, March 2006. 44Philip Verleger, A Primer on Oil Prices II: The Role of Inventories, The Petroleum Economics 

Monthly, February 2006, at p. 20. 45 Verleger, March 2006. 46See the Appendix to this Report for a more detailed discussion of open interest. 47See the Appendix to this Report for a more detailed discussion of this CFTC data. 48 Behind Runaway Prices: Supply Issues are Real, But Hype Sets Bar, Natural Gas Week, 

September 5, 2005. 

estimates are consistently in the range of tens of billions of dollars. 

Last fall, the International Monetary Fund reported, ‘‘Industry estimates suggest that approximately $100–$120 billion of new investment in the past 3 years has been in active and passive energy 

investment vehicles.’’ 40 The New York Times cited an estimate that 

there were ‘‘at least 450 hedge funds with an estimated $60 billion 

in assets focused on energy and the environment, including 200 devoted exclusively to various energy strategies.’’ 41

The increased speculative interest in commodities is also seen in 

the increasing popularity of commodity index funds, which are 

funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and 

mutual funds have invested a total of approximately $85 billion in 

commodity index funds, and that investments in its own index, the 

Goldman Sachs Commodity Index (GSCI), has tripled over the past 

few years to $55 billion.42 In March of this year, petroleum economist Philip Verleger calculated that the amount of money invested 

in commodity index funds ‘‘jumped from $15 billion in 2003 to $56 

billion in 2004 and on to $80 billion today.’’ 43

With respect to crude oil in particular, Verleger estimates that, 

during 2005, $25 billion was ‘‘injected’’ into the West Texas Intermediate (WTI) crude oil futures contract traded on the NYMEX, 

mostly coming from pension funds and other managed money. 

Verleger states ‘‘another $20 billion or so’’ was invested in NYMEX 

WTI contracts in the first few months of this year.44 Overall, 

Verleger estimates that between July 2004 and mid-March 2006, a 

total of approximately $60 billion has been invested in the NYMEX 

WTI contract.45

The increase in speculative trading is directly observable in the 

CFTC weekly reports on trading activity in the CFTC-regulated futures markets. Over the past 2 years, the CFTC data shows more 

than a doubling in the ‘‘open interest’’ in both crude oil and natural 

gas contracts—essentially the number of outstanding futures contracts at the end of a trading day.46 The CFTC data indicates that 

much of the increase is due to ‘‘non-commercial’’ trading—namely, 

trading by speculators.47

2. The Effect of Speculation on Prices

‘‘There is little doubt that Katrina only exacerbated a troubling 

trend in energy prices that already seemed to ignore basic fundamental drivers to thrive instead on hype.’’ 

—A futures trader, September 2005.48

18

49 7 U.S.C. § 5(b), 50 7 U.S.C. § 6a(a). 51 Id. 52 Id. 53 Jad Mouawad and Heather Timmons, Trading Frenzy Adding to Rise in Price of Oil, The 

New York Times, April 29, 2006 (quoting Roger Diwan, partner, PFC Energy). 54 Bhusan Bahree and Ann Davis, Oil Settles Above $70 a Barrel, Despite Inventories at 8-Year 

High, The Wall Street Journal, April 18, 2006. 55 Behind Runaway Prices: Supply Issues are Real, But Hype Sets Bar, Natural Gas Week, 

September 5, 2005. 56Oil: A Bubble, not a Spike? BusinessWeek online, April 27, 2005. 

One of the benefits of speculative trading is that it brings needed 

liquidity to the futures market so that companies seeking to hedge 

their exposure to commodity prices can find counterparties willing 

to take on those price risks. Also, as previously discussed, speculation can help finance the build-up of inventories when prices are 

expected to increase. On the other hand, large speculative buying 

or selling of futures contracts can distort the price signals influencing supply and demand in the physical market or lead to excessive price volatility, either of which can cause a cascade of consequences detrimental to the supply and price of the commodity 

and the overall economy. 

A key responsibility of the CFTC is to ensure that prices on the 

futures market reflect the laws of supply and demand rather than 

manipulative practices 49 or excessive speculation.50 The Commodity Exchange Act (CEA) states, ‘‘Excessive speculation in any 

commodity under contracts of sale of such commodity for future delivery . . . causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and 

unnecessary burden on interstate commerce in such commodity.’’ 51

The CEA directs the CFTC to establish such trading limits ‘‘as the 

Commission finds are necessary to diminish, eliminate, or prevent 

such burden.’’ 52

A number of energy industry participants and analysts have 

noted the divergence between the ample supplies of crude oil and 

natural gas, and record-high prices for those commodities, and 

have attributed some of this disconnect to the presence of speculators in the market. ‘‘Gold prices don’t go up just because jewelers 

need more gold, they go up because gold is an investment,’’ one 

consultant said. ‘‘The same has happened to oil.’’ 53

‘‘The answer to the puzzle posed by rising prices and inventories, 

industry analysts say, lies not only in supply constraints such as 

the war in Iraq and civil unrest in Nigeria and the broad upswing 

in demand caused by industrialization of China and India. Increasingly, they say, prices also are being guided by a continuing rush 

of investor funds in commodities investments.’’ 54 Another gas trader said: ‘‘It’s all about futures speculators shooting for irrational 

price objectives, as well as trying to out-think other players—sort 

of like a twisted game of chess.’’ ‘‘[T]he basic facts are clear,’’ he 

added, ‘‘this market is purely and simply being controlled by overspeculation.’’ 55 Tim Evans, senior analyst at IFR Energy Services, 

stated, ‘‘What you have on the financial side is a bunch of money 

being thrown at the energy futures market. It’s just pulling in 

more and more cash. That’s the side of the market where we have 

runaway demand, not on the physical side.’’ 56

19

57 Natural Gas Week, September 5, 2005. 58See, e.g., Jad Mouawad and Heather Timmons, Trading Frenzy Adding to Rise in Price of 

Oil, The New York Times, April 29, 2006 (‘‘by some estimates 10 percent to 20 percent’’ of current prices); Goldman Sachs, Natural Gas Weekly, December 10, 2004 ($7 per barrel in spring, 

2004); John M. Berry, Speculation plays a role in high oil prices, Alexander’s Gas & Oil Connections, August 17, 2005 (‘‘ ‘Current US oil inventory levels suggest WTI crude prices should be 

around $25 a barrel,’ [oil analyst Mike Rothman of International Strategy and Investment] calculated. ‘Given underlying issues and concerns about OPEC capacity and demand growth, we 

certainly are not prepared to argue that the price spread between the $25 model value and near 

$60 actual is all speculation, but we do feel that a portion is.’ ’’); Oil Pricing: Don’t Underestimate 

the Fear Factor, BusinessWeek online, March 13, 2006 (Sarah Emerson, director of petroleum market analysis and research at Energy Security Analysis estimates an additional $15 per barrel is due to ‘‘fear;’’ Tim Evans, senior energy analyst for IFR Markets, estimates $25–$30 per 

barrel.). 59 Bhusan Bahree and Ann Davis, Oil Settles Above $70 a Barrel, Despite Inventories at 8-Year 

High, The Wall Street Journal, April 18, 2006. 60Platts, OPEC has no option but to maintain output at current prices: Libya, June 15, 2006. 

Similarly, Saudi Arabian Oil Minister Ali Naimi has stated, ‘‘World oil supply is currently exceeding demand, and there is no lack of spare capacity.’’ Kate Dourian, Naimi says producers 

can’t be assured robust demand will continue, Platts Oilgram News, May 16, 2006. U.S. Energy 

Secretary Samuel Bodman agreed with Minister Naimi’s assessment: ‘‘[Secretary] Bodman, 

meeting with reporters after a speech at an electricity forum, suggested that there seems to be 

plenty of oil available.’’ H. Josef Hebert, Energy secretary says U.S. can weather Iranian oil disruption, Associated Press Worldstream, June 6, 2006. 61 Bears Predict Bullish Crude, Gas Bubble to Burst Sooner Than Later, Natural Gas Week, 

June 27, 2005. 62See the Appendix for an explanation of these reports. 

Some traders charge that certain hedge fund managers have purposefully contributed to a misperception that there is a shortage of 

supply. ‘‘There’s a few hedge fund managers out there who are 

masters at knowing how to exploit the peak theories [that the 

world is running out of oil] and hot buttons of supply and demand, 

(and) by making bold predictions of shocking price advancements 

to come (they) only add more fuel to the bullish fire in a sort of 

self-fulfilling prophecy.’’ 57

Several analysts have estimated that the influx of speculative 

money has tacked on anywhere from about $7 to about $30 per barrel to the price of crude oil.58 Even OPEC officials are concerned 

that a shift in the market from high futures prices relative to current prices, to lower futures prices relative to current prices (i.e. 

from contango to backwardation) could precipitate a ‘‘quick drop of 

$20 a barrel or more.’’ 59 Noting that ‘‘fundamentals are in balance 

and stock levels are comfortable,’’ the president of the OPEC cartel, 

Edmund Daukoru, recently attributed the current price levels to 

‘‘refinery tightness, geopolitical developments and speculative activity.’’ 60 Other traders have pointed out the possibility of a sharp 

drop in price. ‘‘At some point, this oversupplied market has to 

begin to break down this house of cards which is dominated by 

speculative entities,’’ one futures trader noted, ‘‘and when those entities decide to start liquidating their futures positions in crude and 

gas, look out below.’’ 61

Generally, economists struggle to quantify the effect of speculators on market prices. Part of the difficulty is due to the absence 

of specific data about the strategies of particular traders or classes 

of traders. The CFTC’s weekly Commitment of Trader Reports are 

not specific or precise enough to provide the basis for rigorous 

quantitative analysis, 62 and commodity traders are, as a rule, reluctant to distribute their data for such purposes. Another difficulty is separating cause from effect: are high prices caused by an 

increase in speculation, or do more speculators enter the market 

20

63Statement of Alan Greenspan Oil Depends on Economic Risks, Hearing before the Senate 

Committee on Foreign Relations, June 7, 2006. 64 Id. 65Goldman Sachs, Natural Gas Weekly, December 10, 2004. 

when prices become more volatile because that is when the profit 

opportunities arise? 

Several recent analyses have concluded that speculation has significantly increased energy prices; others have concluded otherwise.

Former Federal Reserve Chairman Alan Greenspan. In testimony before the Senate Committee on Foreign Relations, former 

Chairman Greenspan stated that, in the last couple of years, ‘‘increasing numbers of hedge funds and other institutional investors 

began bidding for oil [and] accumulated it in substantial net long 

positions in crude oil futures, largely in the over-the-counter market. These net long futures contracts, in effect, constituted a bet 

that oil prices would rise.’’ 63 The former Chairman observed that 

these purchases of oil futures have had a cascade of effects on 

prices, production, inventories, and consumption: 

With the demand from the investment community, oil 

prices have moved up sooner than they would have otherwise. In addition, there has been a large increase in oil inventories. In response to higher prices, producers have increased production dramatically and some consumption 

has been scaled back. Even though crude oil productive capacity is still inadequate, it, too, has risen significantly 

over the past 2 years in response to price.64

Citgroup. In a May 5, 2006 report on prices of U.S. commodities, Citigroup reported that the monthly average value of speculative positions held in all U.S. commodity markets rose to over $120 

billion, just under the record of $128 billion set the previous October. Of the 36 agricultural, energy, and metal commodities analyzed, Citigroup found the largest speculative positions were in natural gas ($30.3 billion) and crude oil ($30.1 billion), followed by 

gold ($13.3 billion). The report stated, ‘‘We believe the hike in speculative positions has been a key driver for the latest surge in commodity prices.’’

Goldman Sachs. In a report on the natural gas markets issued 

in late 2004, Goldman Sachs determined that the rising natural 

gas prices—which were then near $7 per million BTU—were ‘‘rooted in tightening fundamentals.’’ 65 Goldman Sachs also stated, ‘‘Our 

analysis indicates that speculative money does have some impact 

on natural gas prices and the shape of the forward curve.’’ Goldman Sachs reported that the net-speculative positions had depressed the next-month natural gas futures contract price by $0.28 

per million BTU in early December 2004, but the previous spring 

it had increased the ‘‘prompt’’ NYMEX natural gas futures contract 

(i.e., the futures contract that is next to expire) by $0.60 per million 

BTU—an increase of slightly greater than 10 percent. 

The Goldman Sachs report also noted that natural gas prices 

were directly affected by crude oil prices, and ‘‘we believe that speculators also impact the price of crude oil and petroleum products, 

with the impact of speculators peaking at roughly $7 [per barrel] 

21

66Philip K. Verleger, Jr., The Petroleum Economics Monthly, July 2005, at p. 1. 67 Id., at p. 2. 68 Id., at p. 10. 69 Id., at p. 12. 70 Id., at p. 15.

in the spring of 2004.’’ At that time, crude oil prices ranged from 

$35–$40 per barrel; hence, according to the Goldman Sachs analysis, speculators at that time were boosting the price of oil by about 

20 percent. ‘‘Unlike natural gas,’’ Goldman Sachs wrote, ‘‘we estimate that the impact of speculators on oil prices is roughly equivalent in magnitude to the impact of shifts in supply and demand 

fundamentals (as reflected in stocks).’’ In other words, shifts in 

speculative positions could affect crude oil to the same degree as 

actual changes in the supply of or demand for crude oil.

Philip Verleger: A New Era for Energy. In a series of analyses in his publication, The Petroleum Economics Monthly, Philip 

Verleger contends that the recent increase in speculative activity 

has altered the nature of the crude oil markets and boosted futures 

prices. Verleger believes that the recent infusion of tens of billions 

of dollars from pension funds, speculators, and other investors into 

crude oil and natural gas futures markets has ushered in a ‘‘new 

era’’ for energy producers and refiners. ‘‘The current new era is 

marked by the entry of long-term investors, who have pushed forward crude prices to record levels,’’ Verleger writes. ‘‘Consumers, 

no doubt, will have another term for it.’’ 66 During this era ‘‘prices 

will likely be quite high for several years,’’ but ‘‘will be followed by 

a period of very low prices.’’ 67

A key indicator of this new era, according to Verleger, is the 

emergence of a ‘‘ ‘disconnect’ between the cash price behavior and 

the fundamentals, as measured by supply-and-demand balances or 

stocks.’’ 68 The reason for this divergence, in Verleger’s analysis, is 

that purchases of long-term crude oil futures contracts have pushed 

up the longer-term futures prices by so much that it is more profitable for oil companies to store the oil and then sell it at a later 

date than sell it today, even at record-high spot prices. Even if oil 

is at $70 per barrel today, suppliers will hold their inventories if 

they can sell it for $75 for delivery a year from now. 

Since 2001 there has been a dramatic growth in the open interest 

in very long-term futures contracts (30 months or longer). At the 

end of July 2001, there was an open interest of 19,624 in very longterm contracts, representing about 4.5 percent of all open interest; 

at the end of July 2005, there was an open interest of 125,546 in 

very long-term contracts, representing about 15 percent of all open 

interest. According to Verleger, nearly all of the buying of these 

very long-term crude oil futures contracts reflects speculative buying, since commercial firms typically don’t enter into contracts for 

delivery so far into the future, and therefore have no need to use 

such long-term futures contracts for hedging purposes.69

‘‘In summary,’’ Verleger writes, ‘‘increased purchases of longdated crude lift the forward price curve. The rise in prices is reflected back to contracts maturing in a few months.’’ 70 Quantitatively, ‘‘the impact of increasing stocks has been overwhelmed 

22

71 Id., at p. 19. 72Michael S. Haigh, Jana Hranaiova and James A. Overdahl, Office of the Chief Economist, 

U.S. Commodity Futures Trading Commission, Price Dynamics, Price Discovery and Large Futures Trader Interactions in the Energy Complex, Working Paper, First Draft: April 28, 2005. 73 New York Mercantile Exchange, A Review of Recent Hedge Fund Participation in NYMEX 

Natural Gas and Crude Oil Futures Markets, March 1, 2005. 74 Bears Predict Bullish Crude, Gas Bubble to Burst Sooner Than Later, Natural Gas Week, 

June 27, 2005. See, e.g., Oil Market Control Passes From OPEC to Speculators, Jet Fuel Intelligence, August 29, 2005 (‘‘ ‘The amount of paper barrels being traded is extraordinary and this 

has had an extraordinary effect on prices,’ said one industry veteran.’’); Commodity Strategists: 

Oil to Fall, Toronto Bank Says, Bloomberg.com, April 25, 2005 (the speculative rally has ‘‘ ‘decoupled’’ prices from the reality of supply and demand.’’) . 75 Alexei Barrionuevo, Energy Trading, Without a Certain ‘‘E’’, The New York Times, January 

15, 2006. 

by the strong demand for forward crude, which has added as much 

as $24 per barrel to prices.’’ 71

CFTC staff study. In contrast to the studies that have found a 

relationship between speculative activity and price, a CFTC staff 

study released in April 2005 found, in general, ‘‘no evidence of a 

link between price changes and MMT [managed money trader] positions’’ in the natural gas markets and ‘‘a significantly negative relationship between MMT positions and price changes (conditional 

on other participants trading) in the crude oil market.’’ 72 The 

CFTC staff found, generally, that these managed money funds 

tended to follow what the commercial participants in the market 

were doing, and tended to trade less frequently than commercial 

traders. 

NYMEX study. A second study that found no relationship between hedge fund activity and volatility was conducted by the 

NYMEX. Overall, the NYMEX found that during 2004, ‘‘hedge fund 

trading activity comprised a modest share of trading volume in 

both crude oil and natural gas futures markets,’’ and comprised ‘‘a 

relatively modest share of open interest.’’ It also found that hedge 

fund participation during this period tended to decrease volatility. 

‘‘In short,’’ the NYMEX stated, ‘‘it appears that Hedge Funds have 

been unfairly maligned by certain quarters who are seeking simple 

answers to the problem of substantial price volatility in energy 

markets, simple answers that are not supported by the available 

evidence.’’ 73

A number of industry participants have expressed skepticism 

about the accuracy of the NYMEX and CFTC analyses. Neither the 

NYMEX study nor the CFTC study addressed the effects of hedge 

fund and other speculative investments on the price of longer-term 

futures contracts. Rather, both the CFTC study and the NYMEX 

focused on the near-term effects of trading by hedge funds, particularly with respect to volatility. ‘‘[D]espite those [NYMEX and 

CFTC] reports,’’ one trade publication reported, ‘‘a majority of industry professionals still contend that there are too many large 

speculative entities actively engaged in the market—with fund accounts taking on massive equity positions in the commodities.’’ 74

Another article reported that many traders have ‘‘scoffed’’ at these 

two studies, ‘‘saying that they focused only on certain months, 

missing price run-ups.’’ 75

In sum, while industry and regulatory economists and analysts 

do not agree on the extent to which market speculation has affected energy prices, it is beyond dispute that speculation has increased. CFTC data as well as numerous industry reports indicate 

23

76 Robert J. Shiller, Irrational Exuberance (Princeton University Press, 2000), at p. 5.

that speculators have injected tens of billions of dollars into the energy commodities markets. Although the absence of data makes it 

impossible to precisely quantify the effect of these speculative investments on prices, it appears from the CFTC data, market data, 

and the comments of a number of well-respected analysts that this 

increased speculation has fundamentally altered the relationship 

between crude oil inventories and prices. The purchase of long-term 

futures by speculators has provided a financial incentive for oil 

purchasers to build inventories and store oil for future use; this has 

resulted in a market characterized both by large amounts of oil in 

inventory and high prices. 

Whether the current level of speculation has provided needed liquidity, encouraged the building of inventories, or created a speculative bubble in energy prices is impossible to determine without 

additional data. It is clear that better tools are needed to understand how much is being spent, by whom, in which markets and 

instruments, and the effect of increasing speculation on the price 

and affordability of energy in the United States. 

The importance of understanding the effect of speculation on 

market prices cannot be understated. Professor Robert Shiller, in 

his prescient book Irrational Exuberance, which warned that the 

U.S. stock market was in the midst of a speculative bubble just 

prior to the price collapse of 2000–2001, wrote as follows:

The extraordinary recent levels of U.S. stock prices, and 

associated expectations that these levels will be sustained 

or surpassed in the near future, present some important 

questions. We need to know whether the current period of 

high stock market pricing is like the other historical periods of high pricing, that is, whether it will be followed by 

poor or negative performance in coming years. We need to 

know confidently whether the increase that brought us 

here is indeed a speculative bubble—an unsustainable increase in prices brought on by investors’ buying behavior 

rather than by genuine, fundamental information about 

value. In short, we need to know if the value investors 

have imputed to the market is not really there, so that we 

can readjust our planning and thinking.76

In light of the vital importance of energy to our national economy 

and security, the need to better understand the role of speculation 

in price formation is just as important for the energy market as for 

the stock market. 

3. Large Profits from Speculation in Energy Commodities 

Accurate information about the profits and losses of market participants is difficult to obtain. Nonetheless, reports indicate that a 

number of firms, funds, and traders have reaped enormous profits 

from the recent increases in energy prices, energy price volatility, 

and trading volume. These large profits provide an indication of 

one of the incentives for speculation in today’s energy commodity 

markets. 

24

77 Alexei Barrionuevo, Energy Trading, Without a Certain ‘‘E’’, The New York Times, January 

15, 2006. 78Wall Street firms reshape power trading, add liquidity in physical and paper markets, Platts 

Power Markets Week, January 16, 2006; See also, Ann Davis, Morgan Stanley trades energy in 

barrels, Pittsburgh post-gazette.com, March 3, 2005. 79 Rich Blake and Andrew Barber with Robert LaFranco, The Trader Monthly 100; Earn, 

Baby, Earn, Trader Monthly, April/May 2006 (hereinafter cited as ‘‘The Trader Monthly 100’’), 

at p. 69. 80The Subcommittee staff has not verified the information contained in the Trader Monthly

article. 81The Trader Monthly 100,, at p. 71. 82Stephen Taub, Really Big Bucks, Alpha, May 2006, at p. 19. Mr. Pickens ranked second on 

the Alpha list. Mr. James Simons, who Trader Monthly ranked third with an estimated $900 

million–$1 billion in earnings, was ranked first by Alpha, with an estimated $1.5 billion in earnings. The two rankings identify many of the same individuals as the top hedge fund traders, 

although the estimates of earnings vary by significant amounts—hundreds of millions of dollars 

in some instances. The Alpha rankings only list the top 25 traders; with the exception of Mr. 

Pickens, the energy traders identified in the Trader Monthly rankings did not earn enough to 

qualify for this list. See also Alistair Barr, Hedge-fund giants Simon, Pickens made more than $1 bln in 2005, MarketWatch, May 26, 2006, at http://www.marketwatch.com (last visited May 

26, 2006). 83 Brad Foss, AP Interview; Riding high on oil prices, Boone Pickens sees prices going even 

higher, Associated Press, June 22, 2005. 

For example, it has been reported that in 2004, Goldman Sachs 

and Morgan Stanley, the two leading energy trading firms in the 

United States, earned a total of about $2.6 billion in net revenues 

from commodities trading, mostly from energy commodities.77 For 

2005, Goldman Sachs and Morgan Stanley each reportedly earned 

about $1.5 billion in net revenue from energy transactions.78

A recent article in Trader Monthly magazine included short profiles of the ‘‘100 Highest Earning Traders’’ for 2005, as ranked by 

the magazine. Overall, Trader Monthly reported, ‘‘On Wall Street, 

some of the scores were gargantuan, as bulge-bracket banks enjoyed one of the most profitable years in the history of the markets, 

from asset-backed to credit and crude to crack spreads.’’ 79 Although 

the rankings are based on estimates and anecdotal information, 

and the article does not explain how the profiled traders generated 

their income, it nonetheless provides some information regarding 

the magnitude of some of the earnings of leading energy commodity 

traders in 2005.80 The Trader Monthly rankings group these traders into several categories: hedge fund managers, Wall Street Traders, and ‘‘the rest,’’ which includes traders working for brokerage 

firms that own seats on the NYMEX. 

At the top of the Trader Monthly list, T. Boone Pickens was reported to have earned between $1 and $1.5 billion in energy trading in 2005. The magazine reports that Mr. Pickens’ main commodities fund earned a return of approximately 700 percent in 2005, 

which it ‘‘believes is the largest one-year sum ever earned.’’ 81 Another hedge fund magazine, Alpha, estimated that Mr. Pickens’ 

trading strategies earned $1.4 billion in 2005, largely due to his 

bets on crude oil.82

Following an interview with Mr. Pickens, the Associated Press reported, ‘‘Oil tycoon Boone Pickens’ bet that energy prices would rise 

made him more money in the past 5 years than he earned in the 

preceding half century hunting for riches in petroleum deposits and 

companies.’’ 83 During this interview, which occurred in mid-2005, 

when the price of oil was approaching a then-record $60 per barrel, 

Mr. Pickens stated, ‘‘I can’t tell for sure where [prices are] going, 

25

84 Id. It was long before this 2005 interview, however, that Mr. Pickens began betting that 

the price of oil would rise, based on a belief that the rapid increase in demand had used up 

all of the global spare production capacity. In May 2004, for example, when oil was trading at 

about $40 per barrel, and most analysts were predicting prices would fall, Mr. Pickens publicly 

predicted prices would keep increasing: ‘‘I think you’ll see $50 before you see $30 again.’’ Darrell 

Preston, Bloomberg News, T. Boone is Back; The Corporate Raider Who Brought Down Gulf Oil 

is Cashing in on Oil Price Spike, Pittsburgh Post-Gazette, October 10, 2004. Opinions vary as 

to the reason Mr. Pickens has been so successful recently. ‘‘He understands the industry and 

business like no one else,’’ commented billionaire Harold Simmons, one of the original investors 

in Mr. Pickens’ hedge funds. Id. On the other hand, Peter Fusaro, chairman of Global Change 

Associates, a consulting firm, commented, ‘‘He just got lucky.’’ Id. 85 Behind Runaway Prices: Supply Issues are Real, But Hype Sets Bar, Natural Gas Week, 

September 5, 2005. 86See Barrionuevo, Energy Trading, Without a Certain ‘‘E’’, The New York Times, January 

15 2006. 87 Id.; See also, Peter Elkind, Bethany McLean, The Luckiest People in Houston, Fortune, April 

17, 2006. Among those now working for Mr. Arnold is Greg Whalley, who, as head of wholesale 

trading at Enron, once was Mr. Arnold’s boss. In August 2001, following the resignation of Jeffrey Skilling, Mr. Whalley was appointed Enron’s president. Id. 88Two former Enron trading experts share dais and ideas on energy market evolution, Platts 

Power Markets Week, February 13, 2006. 89 Id. 90 Id.

other than up.’’ 84 Mr. Pickens’ success in predicting price increases 

may have even created its own momentum for further price increases—according to Natural Gas Week, ‘‘[Mr. Pickens] regularly 

talks up crude oil and natural gas prices on financial market cable 

TV. Traders and futures brokers report that each time this happens, more speculative interest is drawn to energy futures markets.’’ 85

Also at the top of the list of energy traders is John Arnold, a 

former Enron trader who left Enron in 2002 to start his own hedge 

fund, Centaurus Energy, with three employees and $8 million of 

his own money.86 As of January of this year, Centaurus employed 

36 people and had about $1.5 billion in assets.87 At a recent energy 

conference, Mr. Arnold said he ‘‘looks to place bets on a market 

that he determines is ‘biased,’ ’’ meaning that the market is not reflecting the fair value for a product.88 ‘‘We ask ourselves can we 

identify what is forcing a market to price a product at an unfair 

value, and then, what will push it back to fair value.’’ 89 Mr. Arnold 

also stated how a significant amount of speculative trading was 

taking place on the unregulated over-the-counter Intercontinental 

Exchange (ICE). ‘‘ ‘Trading never went away,’ Arnold said, ‘What 

has changed is the non-commercial type of interest.’ Intercontinental Exchange, he said, has provided huge new opportunities, as 

has NYMEX’s Clearport trading. ‘Because of this, there has never 

been as much investor interest . . . as there is today.’ ’’ 90

Table 1 lists the traders who Trader Monthly reported to have 

obtained a significant portion of their profits from trading energy 

commodities. Inclusion on this list is not meant to imply that any 

of the traders derived their profits from any improper trading activity.

26

Table 1

Selected Top Energy Traders in 2005

Trader Firm Type of Trader 2005 Estimated 

Earnings Trader Monthly Comments 

T. Boone Pickens BP Capital (hedge 

fund) 

$1.5 billion + ‘‘ ‘Long Crude’ doesn’t even begin to describe T. 

Boone Pickens’ position. With $5 billion and 

growing in assets under management, his 

fund company, BP Capital, is throwing off a 

small national economy via an unshakable bet 

that the world’s oil supply can’t keep up with 

demand. . . . Returns on Pickens’ main commodities pool were over 700 percent in 2005. 

. . . [This] translates into what Trader 

Monthly believes is the largest one-year sum 

ever earned. . . .’’

Brian Hunter Amaranth Advisors 

(hedge fund) 

$75–$100 million ‘‘In 2005, Hunter was certainly among the top 

natural gas traders in the world. . . . Rumor 

is that Hunter made Amaranth an estimated 

$800 million off his book, mainly [natural] gas 

derivatives positions but also some other energy dabblings.’’

John Arnold Centaurus Energy 

(hedge fund) 

$75–$100 million ‘‘Starting 4 years ago with $8 million of his own 

dough, John D. Arnold, former star Enron energy trader, has since amassed more than $1 

billion in assets. Most of the 16 other traders 

at his Centaurus Energy fund operation came 

from Enron.’’

Jim Pulaski Tudor Investment 

(hedge fund) 

$50–$75 million ‘‘[T]his Tudor energy trader is commander in 

chief when it comes to natural gas.’’

Steven Berkson Trader 

(NYMEX) 

$25–$30 million ‘‘Readers of Trader Monthly will remember the 

legend of natural-gas-futures stalwart Steve 

Berkson and Hurricane Katrina. One of the 

tallest versions of the tale has Berkson making $40 million off the opening bell the day 

Katrina made landfall (we heard he ended up 

tallying around $20 million for the week). 

Lesser known is how much of that score Berky 

ultimately slid to relief efforts (reportedly a 

sizable portion).’’

Mark Fisher MBF Clearing operator (NYMEX) $25–$30 million ‘‘Few people have more at stake in the future of 

the NYMEX than Fisher, who runs MBF Clearing, the primary market-making operation for 

the exchange’s top-grossing crude-oil futures 

contract.’’

Simon Greenshields Morgan Stanley $20–$25 million ‘‘Morgan Stanley’s head of gas and power, 

Greenshields is part of the bank’s elite energy 

crew. His specialties are natural gas and electricity. . . .’’

Olav Refvik Morgan Stanley $20–$25 million ‘‘Refvik is a key part of one of the most profitable energy-trading operations in the world. 

He has helped the bank dominate the heating 

oil market by locking up New Jersey storagetank farms adjacent to New York Harbor. 

. . .’’

27

Table 1—Continued

Selected Top Energy Traders in 2005

Trader Firm Type of Trader 2005 Estimated 

Earnings Trader Monthly Comments 

John Shapiro Morgan Stanley $20–$25 million ‘‘Shapiro has been a vital part of Morgan’s energy effort, working [to help] oversee the 200-

plus-person profit center.’’

John Bertuzzi Goldman Sachs $15–$20 million ‘‘A star trader on one of the most powerful energy desks on earth. . . .’’

George ‘‘Beau’’ Taylor J.P. Morgan $15–$20 million ‘‘[Taylor] . . . switched over to J.P. Morgan, 

where he now helps oversee the firm’s 80-person energy-trading unit.’’

Jeffrey Wolfson Trader (NYMEX) $15–$20 million ‘‘Crude oil traders don’t come much bigger than 

the man whose badge reads GEOF. A one-man 

volume-generation machine. . . .’’

Vincent Kaminski Citigroup $10–$15 million ‘‘Kaminski is a revered energy trader considered 

among the foremost authorities on measuring 

and analyzing market risk. . . .’’

Todd Applebaum Trader (NYMEX) $10–$15 million ‘‘Applebaum is another natural gas guy who lit it 

up in 2005. ‘Great trader, huge volume,’ says 

one NYMEX insider.’’

Eric Bolling Trader (NYMEX) $10–$15 million ‘‘Among the most famous natural gas traders on 

the floor today . . . [Bolling] is said to account for as much as 5 percent of total volume in [natural gas]. . . .’’

Sandy Goldfarb Trader (NYMEX) $10–$15 million ‘‘. . . [Goldfarb] knocked his [natural gas] book 

out of the ozone layer last year amid one hurricane after another and some of the most 

treacherous volatility ever recorded in the decade and a half since natural gas futures were 

created. . . .’’

Robert Halper Trader (NYMEX) $10–$15 million ‘‘When it comes to [arbitraging] crude oil against 

gasoline, Bob Halper wrote the book. According 

to some, he will go down as one of the biggest crack-spread traders the NYMEX has ever 

seen.’’

Daniel Lirtzman Trader (NYMEX) $10–$15 million ‘‘A natural gas ‘natural.’. . .’’

Kevin McDonnell Trader (NYMEX) $10–$15 million ‘‘Chalk up yet another blowout year. . . .’’

Simon Posen Trader (NYMEX) $10–$15 million ‘‘Last year’s natural gas swings produced a significant surge in Posen’s trading profits.’’

Mitchell Stern Trader (NYMEX) $10–$15 million ‘‘Stern had a huge year, sources say.’’

Table 1. Large trader profits are an indicator of increased speculation in energy 

commodity markets. Data source: Trader Monthly, April/May 2006.

Not only are the top traders for investment banks and funds 

earning record incomes, but in-house corporate traders are earning 

record amounts as well. According to a recent article in Bloomberg

news, at Sempra Energy, the owner of the biggest U.S. natural gas 

utility, ‘‘as many as 30 commodity traders [make] more than the 

$2 million earned last year by Chief Executive Officer Don 

Felsinger. ‘That’s what it costs to be in this business,’ Felsinger 

28

91What’s a Top Commodity Trader Worth? Quintuple 2000 Salaries, Bloomberg.com, June 1, 

2006. 92 Id. 93 7 U.S.C. § 5. 94The provisions of the CFMA that provide exclusions and exemptions for energy and metal 

commodities were included in the version of the legislation that passed the House on October 

19, 2000 (H.R. 4541, 106th Cong., 2nd Sess.), but were omitted from the version placed on the 

Senate calendar after passage by the Senate Committee on Agriculture in late August (S. Rept. 

106–390). Following negotiations between members of the House and Senate Agriculture committees, the legislation that became the Commodity Futures Modernization Act—with the exclusions for energy and metal commodities—was introduced in the House on December 14 and in 

the Senate on December 15, 2000. The CFMA was passed by both the House and Senate on 

December 15, the last day of the 106th Congress, as part of an omnibus legislative package involving 13 appropriations bills and several authorization bills. There was no opportunity for debate on any of the specific provisions in the CFMA; the Senate passed this entire omnibus package by unanimous consent. A history of the regulation of the trading of energy commodities is 

presented in Appendix 2 of the Report prepared by the Minority Staff of the Permanent Subcommittee on Investigations, U.S. Strategic Petroleum Reserve: Recent Policy Has Increased 

Costs to Consumers But Not Overall U.S. Energy Security, S. Prt. 108–18, 108th Cong., 1st Sess. 

(March 5, 2003). 95 7 U.S.C. § 2(h)(3). 

[said] in a May 17 interview.’’ 91 Bloomberg also reported that division managers for commodities trading were also the most highly 

paid employees at Constellation Energy, earning approximately $5 

million in bonuses, compared to a total compensation package of 

about $4 million for the chief executive officer.92

IV. NO COP ON THE BEAT FOR OVER-THE-COUNTER 

ENERGY MARKETS 

Until recently, the trading of U.S. energy futures was conducted 

exclusively on regulated exchanges within the United States, like 

the NYMEX, and subject to extensive oversight by the CFTC and 

the exchanges themselves in order to detect and prevent price manipulation. Under the Commodity Exchange Act, the purpose of 

CFTC regulation is to deter and prevent price manipulation, ensure the ‘‘financial integrity’’ of transactions, maintain market integrity, prevent fraud, and promote fair competition.93 This regulation and the resulting transparency has bolstered investor confidence in the integrity of the regulated U.S. commodity markets 

and helped propel U.S. exchanges into the leading marketplace for 

many commodities. 

Pursuant to its statutory mandate to detect and prevent price 

manipulation, the CFTC has imposed a variety of reporting requirements and regulations on the trading of commodity futures 

and options. NYMEX traders, for example, are required to keep 

records of all trades and report large trades to the CFTC. The 

CFTC uses these Large Trader Reports, together with daily trading 

data providing price and volume information, to monitor exchange 

activity and detect unusual price movements or trading. 

None of this oversight to prevent price manipulation, however, 

applies to any of the energy trading conducted on OTC electronic 

exchanges. As a result of a provision inserted by House and Senate 

negotiators during the waning hours of the 106th Congress into 

legislation that became the Commodity Futures Modernization Act 

of 2000 (CFMA), 94 the Commodity Exchange Act exempts from 

CFTC oversight all trading of energy commodities by large firms on 

OTC electronic exchanges.95

In recent years, there has been a tremendous growth in the trading of energy commodity contracts that are virtually identical to fuVerDate 0ct 09 2002 09:54 Aug 01, 2006 Jkt 028640 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 C:\DOCS\28640.TXT SAFFAIRS PsN: PAT
29

96Gerelyn Terzo, A Battle Royal; A sleek upstart and an entrenched giant are waging all-out 

war for the soul of the energy trading market, Investment Dealers Digest, May 1, 2006. 97 Initially, the most prominent of these electronic exchanges was operated by Enron. On 

Enron’s electronic trading platform, called ‘‘Enron OnLine,’’ Enron became the counterparty to 

all of the trades. Enron’s position as a party to all trades provided Enron with superior market 

information and created a non-level playing field. Following Enron’s collapse and the subsequent 

revelations of how Enron abused its superior knowledge and market position, see, e.g., note 117, 

the Enron ‘‘one to many’’ trading model was discredited. Today, all of the electronic exchanges 

are ‘‘many to many’’ exchanges, meaning that the parties trade with each other rather than the 

operator of the exchange. 

tures contracts, but which are traded on OTC electronic exchanges 

rather than the regulated futures exchanges. These contracts are 

so similar to futures contracts that they are often called ‘‘futures 

look-alike contracts.’’ Although the trading of futures contracts on 

futures markets is subject to extensive oversight, as a result of the 

CFMA exemptions the trading of futures look-alikes on an OTC 

electronic exchange is not subject to any CFTC oversight. The 

growth of these OTC electronic markets, therefore, has been creating an increasing ‘‘blind spot’’ in the CFTC’s oversight of the 

trading of energy commodity futures. This increasing blind spot 

significantly impairs the CFTC’s ability to carry out its statutory 

mandate to detect and prevent price manipulation. 

A. Development of OTC Electronic Markets 

‘‘Enron did two things for us. It validated our model, and in 

2000, 13 big market makers agreed to support the ICE’s efforts.’’ 

—Jeffrey Sprecher, Chairman and CEO, Intercontinental 

Exchange 96

Initially, the OTC market was not an actual place or facility 

where trading occurred, but rather a general term that referred to 

instances in which two parties would come together to reach agreement on a contract between them to protect against or assume 

price risks that could not be adequately addressed by the trading 

of standardized futures contracts on the regulated futures exchanges. Until the advent of electronic trading in the late 1990s, 

the terms of most OTC contracts were customized through negotiations between the two parties, either face-to-face or through brokers over the telephone. Because the terms of these customized, bilateral deals were unique, and the contracts generally could not be 

traded or assigned to third parties, these OTC contracts were considered simply as bilateral contracts, outside the CFTC’s jurisdiction. 

In the 1990s, as energy deregulation gained momentum, and energy was increasingly being considered as another commodity 

priced on an open market, energy producers and suppliers desired 

additional protections against market price risks. OTC contracts 

became more popular, and the increasing number of energy providers, merchants and traders holding these contracts desired to 

trade these OTC instruments to third parties to help reduce, diversify or spread the risks they had assumed. In response, the OTC 

market began to develop standardized OTC contracts that could be 

traded to multiple parties. Following rapid developments in computer and internet technology in the 1990s, a number of companies 

and groups developed electronic exchanges to facilitate these OTC 

trades.97

30

98The founding partners of ICE are BP Amoco, Deutsche Bank AG, Goldman Sachs, Dean 

Witter, Royal Dutch/Shell Group, SG Investment Bank, and Totalfina Elf Group. In November 

2005, ICE became a publicly traded corporation. Many of these original founders are major 

shareholders: Morgan Stanley owns nearly 15 percent of ICE shares, Goldman Sachs owns about 

14 percent, Total owns about 9.5 percent, and BP owns about 9 percent. Market Forces: Big Oil 

increases market reach, Energy Compass, March 24, 2006. 99Participation is restricted to parties that quality as an ‘‘eligible commercial entity’’ under 

Section 1a(11) of the CEA. Generally, these entities are large financial institutions, insurance 

companies, investment companies, corporations and individuals with significant assets, employee benefit plans, government agencies, and registered securities brokers and futures commission merchants. 100 Intercontinental Exchange Inc, Form 10–K, filed March 10, 2006 (‘‘ICE 10–K’’), at p. 14. 

There does not appear to be any mechanism to ensure that only eligible commercial entities actually trade on ICE. The CFTC does not monitor or oversee participation; ICE declined to answer the Subcommittee staff’s questions as to whether or how it monitors trader qualifications. 101 ICE 10–K, at p. 14. 102 ICE 10–K, at p. 6. As explained in Section V, in 2001, ICE purchased the International 

Petroleum Exchange, a London-based futures exchange that traded North Sea Brent crude oil 

and natural gas delivered in Europe. In 2005, ICE renamed the London exchange as ‘‘ICE Futures’’ and converted its open-outcry pit trading system into an all-electronic exchange. Hence, 

ICE now operates two major electronic markets: ICE Futures and ICE OTC. ICE Futures is a 

futures market in London, regulated by the U.K. Financial Services Authority, and ICE OTC 

operates as an ‘‘exempt commercial market’’ under Section 2(h)(3) of the U.S. Commodity Exchange Act. Both markets operate outside of the CFTC’s oversight. 103 In contrast, on NYMEX and other regulated futures exchanges, the exchange clearinghouse 

acts as the buyer for all sellers and the seller for all buyers. Persons that are not members of 

the exchange must trade through a clearing member. Clearing members accept all financial responsibility for the trades they conduct on behalf of the customer initiating the trade. 

In 2000, a half dozen investment banks and oil companies formed 

the Intercontinental Exchange (ICE) for OTC electronic trading in 

energy and metals commodities.98 The Atlanta-based ICE is an 

electronic exchange open only to large commercial traders that 

meet the definition of an ‘‘eligible commercial entity’’ under the 

Commodity Exchange Act.99 According to ICE, its market participants ‘‘must satisfy certain asset-holding and other criteria and 

include[] entities that, in connection with their business, incur 

risks relating to a particular commodity or have a demonstrable 

ability to make or take delivery of that commodity, as well as financial institutions that provide risk-management or hedging services to those entities.’’ 100

Today, ICE operates the leading OTC electronic exchange for energy commodities. ICE describes its participants as ‘‘some of the 

world’s largest energy companies, financial institutions and other 

active contributors to trading volume in global commodity markets. 

They include oil and gas producers and refiners, power stations 

and utilities, chemical companies, transportation companies, banks, 

hedge funds and other energy industry participants.’’ 101 According 

to ICE, its electronic markets now constitute ‘‘a significant global 

presence with over 9,300 active screens at over 1,000 OTC participant firms and over 440 futures participant firms as of December 

31, 2005.’’ 102

Unlike NYMEX, ICE does not require its participants to become 

formal members of its exchange or to join a clearinghouse.103 Any 

large commercial company qualifying as an eligible commercial entity can trade through ICE’s OTC electronic exchange without having to employ a broker or pay a fee to a member of the Exchange. 

Although ICE’s OTC exchange does not operate its own clearinghouse, ICE has contracted with a third party, the LCH.Clearnet, 

to offer clearing services for traders who desire to trade only with 

other cleared traders. By trading only with other cleared traders, 

a party trading on ICE can eliminate the risk of default by the 

31

104 NYMEX also offers an electronic trading platform for the trading of standardized OTC instruments, and provides clearinghouse services, called ‘‘NYMEX ClearPort,’’ for traders using 

the NYMEX OTC electronic trading platform. NYMEX states that its OTC clearing service ‘‘lets 

market participants take advantage of the financial depth and security of the Exchange clearinghouse along with round-the-clock access to more than 60 energy futures contracts including 

natural gas location differentials; electricity, crude oil spreads and outright transactions; refined 

product crack and location spreads and outright transactions; and coal.’’ NYMEX, NYMEX 

ClearPort Services, on NYMEX website, at http://www.nymex.com/cp—overview.aspx (last visited May 19, 2006). 105 Intercontinental Exchange Inc., Form 10–Q, filed May 2, 2006 (‘‘ICE 10–Q’’), at p. 16. In 

2005, ICE also contracted with North American Energy Credit and Clearing, LLC, to provide 

clearing for trades in physically-settled OTC natural gas and power contracts. Id. 106 ICE 10–Q, at p. 17. 107 ICE 10–K, at p. 5. 108 ICE 10–K, at p. 5. ICE states, ‘‘both physically-delivered and cash-settled gas products can 

be traded at a fixed price or differential to recognized published indices.’’ ICE website, at https:/

/www.theice.com/naturalgas.jhtml. See also, e.g., ICE, OTC Natural Gas Clearing and Credit, 

Product Specifications, March 24, 2006; ICE, OTC Natural Gas and Financial Power Clearing 

and Credit, Product Specifications for products to be launched on April 7, 2006. ICE further amplifies: ‘‘A substantial portion of the trading volume in our OTC markets relates to approximately 15-20 highly liquid contracts in natural gas, power, and oil. For these contracts, the 

highest degree of market liquidity resides in the prompt, or front month, whereas that liquidity 

is reduced for contracts with settlement dates further out, or in the back months.’’ ICE 10–K, 

at p. 9. 

other party just as if he or she were trading on a futures exchange, 

thereby avoiding one of the traditional disadvantages of OTC trading.104 ICE describes the advantages of OTC trading through a 

clearinghouse: 

The use of OTC clearing serves to reduce the credit risk 

associated with bilateral OTC trading by interposing an 

independent clearinghouse as a counterparty to trades in 

these contracts. The use of a central clearinghouse rather 

than the reliance on bilateral trading agreements [has] resulted in more participants becoming active in the OTC 

markets. In addition, clearing through a central clearinghouse typically offers market participants the ability to reduce the amount of capital required to trade as well as the 

ability to cross-margin positions in various commodities.105

ICE claims that its OTC markets ‘‘offer trading in hundreds of 

natural gas, power and refined oil products on a bilateral basis. At 

the end of first quarter 2006, we also offered over 50 cleared OTC 

contracts, which account for the majority of our commission revenue. In March 2006, we began the introduction of more than 50 

planned additional cleared OTC contracts, with the first 34 cleared 

contracts launched through the end of April this year.’’ 106 According to ICE, its natural gas contracts are its most heavily traded 

contracts. ICE states it traded nearly 43 million cleared OTC 

Henry Hub natural gas contracts in 2005, ‘‘compared to 10.4 million cleared OTC Henry Hub natural gas contracts traded by our 

nearest competitor during the same period.’’ 107

ICE claims that its ‘‘introduction of cleared OTC products has enabled us to attract significant liquidity in the OTC markets we operate.’’ 108 Others agree. ‘‘[C]learing is paving the way for greater 

growth of the energy market as a whole,’’ one futures industry publication reported. ‘‘Clearing not only helped restore liquidity postEnron, it opened the door to an influx of hedge funds and other 

professional traders, many of whom come from the financial world.’’ 

Moreover, OTC clearing has ‘‘created a new linkage’’ between the 

futures markets and the OTC markets. ‘‘On one level this is simple 

32

109Will Acworth, The Tipping Point: OTC Energy Clearing Takes Off, Futures Industry Magazine, January/February 2005. 110 Id. Although NYMEX’s ClearPort offers a similar OTC trading opportunities, ICE currently 

has approximately 80 percent of the market for cleared OTC Henry Hub natural gas contracts 

and 85 percent of the cleared OTC PJM financial power contracts. ICE 10–Q, at p. 28. 111Generally, futures contracts for key energy commodities can be settled through physical delivery of the commodity, whereas OTC futures look-alikes are financially settled. Since only a 

small percentage of futures contracts actually result in physical delivery of the commodity, this 

distinction does not make a practical difference in the economic function or utility of the two 

types of contracts. Moreover, many of the financially-settled OTC contracts reference the 

NYMEX price for settlement; in this respect the two markets are intertwined. 112 ICE 10–K, at p. 25. 113 7 U.S.C. Sec. 2(h)(3). 114 7 U.S.C. Sec. 1a(11). 

arbitrage between two sets of similar contracts. On another level 

it is a cross-fertilization of people and ideas, as each side seeks out 

better opportunities in newly accessible markets.’’ 109 ‘‘If you want 

to participate in all the information of the market,’’ said Bo Collins, 

former President of NYMEX, and now the operator of his own 

hedge fund, ‘‘you have to participate electronically and OTC.’’ 110

Today, there are few, if any, practical differences between the energy commodities traded on the regulated futures markets and the 

standardized, cleared contracts traded on the unregulated OTC 

electronic exchanges. From an economic perspective, there is no 

distinction between trading a standardized, cleared OTC contract 

for future delivery on ICE and trading a standardized, cleared futures contract on NYMEX.111 Both types of contracts allow buyers 

and sellers to hedge against price risks and to speculate on price 

changes. In each market counterparty risk is eliminated by use of 

a clearinghouse. In each market, contracts are put on the market 

and bought and sold many times. 

From a practical perspective, the only real difference between the 

two markets is the degree of regulation. ICE distinguishes its OTC 

market from the regulated futures exchanges primarily by the absence of regulation.112 Trading on the futures market is subject to 

CFTC oversight, while trading on the unregulated OTC exchanges 

is not. 

B. No Oversight of OTC Electronic Markets 

Section 2(h)(3) of the Commodity Exchange Act, which became 

law as part of the CFMA, exempts from CFTC oversight all agreements, contracts, and transactions in energy and metals (‘‘exempt 

commodities’’) that are traded on electronic trading facilities between ‘‘eligible commercial entities.’’ 113 Generally, an eligible commercial entity must be either a large financial institution, insurance company, investment company, corporation or individuals 

with significant assets, employee benefit plan, government agency, 

registered securities broker, or futures commission merchant. Markets operating under Section 2(h)(3) are referred to as ‘‘exempt 

commercial markets.’’ 114

An exempt commercial market (ECM) is subject to the CEA’s 

statutory prohibitions on fraud and price manipulation and, if the 

CFTC determines that the market performs a significant price discovery function, the ECM must provide pricing information to the 

public, but otherwise it is fully exempt from the CFTC’s regulatory 

oversight. The CFTC describes its authority over these ECMs as 

follows:

33

115 Cite to Section 2(h)(3). CFTC, Exempt Commercial Markets That Have File Notice with the 

CFTC, at CFTC website at http://www.cftc.gov/dea/dea—ecm—table.htm (last visited May 19, 

2006).

In contrast to its authority over designated contract 

markets and registered derivatives transaction facilities, 

the CFTC does not have general oversight authority over 

exempt commercial markets. Exempt commercial markets 

are not registered with, or designated, recognized, licensed 

or approved by the CFTC.115

Today, the CFTC does not apply to exempt commercial markets 

like ICE any of the oversight and surveillance measures it currently uses to oversee regulated futures markets like the NYMEX. 

Table 2 provides a comparison of the oversight mechanisms used 

to police trading on the two markets and prevent price manipulation and fraud.

Table 2

Futures and Exempt Commercial Markets: 

Differences in Oversight to Prevent Price Manipulation 

Measure to Prevent Price Manipulation 

Does the Measure Apply to the: 

Futures Market Exempt Commercial 

Market 

CFTC Market Surveillance Program

• CFTC staff monitoring of daily trading reports Yes No

• Weekly reports and reviews for expiring contracts Yes No

• Option of special data call by CFTC Yes Yes

Large Trader Reporting

• Large trader reporting by clearing members Yes No

• Large trader reporting by exchanges Yes No

• Filing of information about trading accounts by traders Yes No

Core Principles for Exchange Operations

• Exchange is responsible for monitoring compliance with market 

rules Yes No

• Exchange can only list contracts for trading that are not readily 

susceptible to manipulation Yes No

• Exchange must monitor trading to prevent manipulation, price 

distortion, and disruption of the delivery or cash-settlement 

process Yes No

• Position limits for speculators to reduce the potential threat of 

manipulation or congestion Yes No

• Emergency authority, in consultation with the CFTC, to liquidate 

positions, suspend trading, or impose special margin requirements Yes No

• Daily submission of trading information to CFTC Yes Limited

• Daily publication of trading information Yes *

• Exchange must keep records of trading Yes Yes 

* Section 2(h)(4) of the Commodity Exchange Act requires daily publication of trading information if the market performs 

a price discovery function. The CFTC has not made any determination as to whether any of the exempt commercial markets 

performs a price discovery function. See Section IV.D. in this report. 

34

116 7 U.S.C. § 5. This statement of purpose in the CEA was revised to read in its current form 

as part of the CFMA of 2000. 117See, e.g., August 2002 report prepared by the Federal Energy Regulatory Commission 

(FERC) staff, Docket No. PA–02–000, which found significant evidence of price manipulation 

and deceptive practices by Enron in connection with its OTC electronic trading platform, known 

as Enron OnLine. The report includes a detailed analysis of natural gas trades made on Enron 

OnLine for next-day delivery into California over the course of a single day, January 31, 2001. 

The report found that of a total of 227 trades on that day, 174 involved Enron and a single 

unnamed party; these 174 trades took place primarily during the last hour of trading, and by 

using ‘‘higher prices,’’ these trades resulted in a steep price increase over the last hour of trading. The report also noted that price information displayed electronically on Enron OnLine was 

a ‘‘significant, even dominant’’ source of price information used by reporting firms publishing 

These differences are substantial. For example, unlike the regulated exchanges, on OTC electronic exchanges, neither the CFTC 

nor the OTC trading facility itself monitors trading activity to detect and deter fraud and price manipulation. Key trading information is not disclosed to the CFTC or the public. Although ICE discloses to the CFTC and subscribers of its data services certain information about posted bids, offers, and completed trades, other 

critical data routinely reported by the regulated exchanges to the 

CFTC and the public, such as open interest, is not reported by ICE. 

Large trader reports do not have to be filed with the CFTC. Unlike 

trading on the NYMEX, there are no position limits or price change 

limits. 

The most frequently asserted justification for this disparity in 

regulatory coverage is that only large institutions that are sophisticated traders with less need for governmental protection are permitted to trade on these electronic trading facilities. But federal 

regulation of commodity markets is not designed solely to protect 

commodity traders; it is also intended to protect commodity purchasers and the public at large, including consumers who ultimately bear the costs of energy products such as gasoline, heating 

oil, diesel fuel, and natural gas. 

The Commodity Exchange Act articulates the national interest in 

preventing price manipulation and excessive speculation:

The transactions and prices of commodities on such 

boards of trades are susceptible to excessive speculation 

and can be manipulated, controlled, cornered or squeezed 

to the detriment of the producer or the consumer and the 

persons handling commodities and the products and byproducts thereof in interstate commerce, rendering regulation imperative for the protection of such commerce and 

the national public interest therein.116

The history of commodity markets demonstrates it is unrealistic 

to rely on the self-interest of a few large traders as a substitute for 

dedicated, independent oversight to protect the public interest. 

Commodity traders have no responsibility or obligation to look out 

for public rather than private interests. In some cases, it could be 

a breach of fiduciary duty for officers of a private corporation to 

look out for interests other than those of the corporation’s shareholders. Most recently, the Enron scandal, which involved misconduct by a number of traders at large energy and trading companies active in OTC trading, is clear evidence of how a few sophisticated, unscrupulous traders can harm not only other market participants, but also the public at large by artificially increasing 

prices.117 Consumers paying artificially high energy prices suffer 

35

natural gas pricing data. The report tentatively concluded that Enron OnLine price data was 

susceptible to price manipulation and may have affected not only Enron trades, but also increased natural gas prices industrywide. 118Letter from Reuben Jeffery III, Chairman, Commodity Futures Trading Commission, to 

Governor Jennifer Granholm, August 22, 2005. 119 CFTC Backgrounder, The CFTC Market Surveillance Program, June 2001, at CFTC 

website, at http://www.cftc.gov/opa/backgrounder/opasurveill.htm?from=home&page=mktsurveilcontent. 120Letter from Reuben Jeffery III, Chairman, Commodity Futures Trading Commission, to 

Governor Jennifer Granholm, August 22, 2005. 121 CFTC, The CFTC Market Surveillance Program. 122Letter from Reuben Jeffery III, Chairman, Commodity Futures Trading Commission, to 

Governor Jennifer Granholm, August 22, 2005. 123 Id. 124Statement of Dr. James Overdahl, Global Oil Demand/Gasoline Prices, Hearing before the 

Senate Committee on Energy and Natural Resources, September 6, 2005. 

the same harm regardless of whether the price was manipulated on 

an OTC electronic exchange or on a regulated futures market. 

C. No Large Trader Reporting in OTC Electronic Markets 

As indicated in Table 2, Large Trader Reports are not required 

in OTC electronic markets. The absence of information about large 

trades increases the vulnerability of these markets to price manipulation and excessive speculation. 

CFTC Chairman Reuben Jeffery III, recently stated, ‘‘One of the 

core themes of the Commodity Exchange Act . . . is that the commodity markets operate free of manipulation and the Commission’s 

most basic responsibility is to detect and deter such behavior so 

that markets operate in an open and competitive manner, free of 

price distortions.’’ 118 To fulfill this responsibility, the Commission 

has established a market surveillance program, whose primary 

mission is ‘‘to identify situations that could pose a threat of manipulation and to initiate appropriate preventive actions.’’ 119 ‘‘[T]he 

Commission attempts to proactively combat potential manipulation,’’ Chairman Jeffery explains, ‘‘rather than simply waiting until 

someone has attempted to manipulate prices.’’ 120 The CFTC staff 

monitors the daily trading on the regulated exchanges, with particular focus on ‘‘the daily activities of large traders, key price relationships, and relevant supply and demand factors.’’ 121

The ‘‘cornerstone’’ of the surveillance program is the Commission’s Large Trader Reporting (LTR) system.122 Chairman Jeffery 

states the LTR system ‘‘enables detection of concentrated and coordinated positions that might be used by one or more traders to 

attempt manipulation. This transparency is also well known to 

market participants, providing yet another element of deterrence.’’ 123 The CFTC’s Chief Economist, Dr. James Overdahl, recently told Congress that the LTR system ‘‘is a powerful tool for detecting the types of concentrated and coordinated positions required 

by a trader or group of traders attempting to manipulate the market.’’ 124

Under the LTR system, clearing members of futures exchanges 

(the entities that actually do the trading on behalf of customers) 

must file daily reports with the CFTC identifying the futures and 

options positions held by its customers above specific threshholds 

established by the Commission. To enable the CFTC to aggregate 

trader positions that may have been established through more than 

one clearing member, traders themselves are required to inform 

the CFTC of each account that acquires a reportable position. 

36

125 CFTC Backgrounder, The CFTC’s Large-Trader Reporting System, at CFTC website, at 

http://www.cftc.gov/opa/backgrounder/opa-ltrs.htm. 126 Id. 127 CFTC, The CFTC Market Surveillance Program. 128There are anecdotal reports that some traders prefer trading on the OTC energy markets 

in the United States because of the lack of regulation. Natural Gas Week recently quoted one 

trader: 

When volumes all of a sudden begin to increase in one market and begin to erode in another, you have to ask yourself where the real market is? Since there’s not the same sort 

of mandatory reporting requirements in the OTC world, it’s very likely the funds have had 

their fill of being scrutinized and spot-lighted as the culprits, so they are moving into another market area that is not so easily tracked and doesn’t have as much attention drawn 

to it. 

Funds Increasing OTC Volumes, Sidestepping Nymex Oversight, Natural Gas Week, April 25, 

2005. Natural Gas Week also reported that hedge funds ‘‘benefit from the OTC traded futures 

market because they are not as transparent as NYMEX traded futures, and the non-commercial 

reporting requirements such as the CFTC mandated Commitment of Traders Report is not as 

stringent.’’ Id. The article explained how speculators can influence the futures markets through 

their activity in the OTC market, or vice versa, and capture a profit through the difference in 

price between the two markets that may result from trading in one of the markets. 

‘‘Last week, there was a lot of arbitrage going on between the OTC gas futures markets 

and the NYMEX futures markets, because at times the OTC markets were as much as 5 

cents in back of the futures screen,’’ another gas futures trader said. ‘‘The OTC futures markets usually trade nearly in tandem with the NYMEX futures screen, but it’s not uncommon 

to be able to capture a spread between the two markets. Still, it’s amazing that the speculative entities in the OTC market can move the NYMEX down by 5 cents or more in about 

30 seconds. But they could just as easily position themselves in the OTC market to influence the NYMEX futures market to the upside as well,’’ the trader added. 

‘‘Only by properly identifying and aggregating accounts can the 

surveillance staff make a thorough assessment of a trader’s potential market impact and a trader’s compliance with speculative position limits.’’ 125 The exchanges themselves are required to report 

similar data to the CFTC. According to the CFTC, ‘‘The aggregate 

of all large-traders’’ positions reported to the Commission usually 

represents 70 to 90 percent of the total open interest in any given 

market.’’ 126

The Commission describes how it uses this data to take appropriate action to detect and deter price manipulation:

Surveillance economists prepare weekly summary reports for futures and options contracts that are approaching their critical expiration periods. Regional surveillance 

supervisors immediately review these reports. Surveillance 

staff advise the Commission and senior staff of potential 

problems and significant market developments at weekly 

surveillance meetings so that they will be prepared to take 

prompt action when necessary.127

The LTR system also provides critical information for the weekly 

Commitment of Traders Reports that the CFTC provides to the 

public. The CFTC’s Chief Economist stated, ‘‘Data from the CFTC’s 

Large Trader Reporting System can help answer questions about 

the role of non-commercial traders in U.S. energy futures markets.’’ 

This data can be used to help determine the relative participation 

of commercial participants (firms that buy or sell the traded commodity as part of their business and use the futures markets for 

hedging) and of speculators (who are not using the market for 

hedging physical commodities). Without a Large Trader Reporting 

system, it is impossible to determine the composition of the futures 

markets and analyze the influence of speculation on market 

prices.128

37

Id. The article also noted that funds can take large positions in the OTC market without having to report those positions to any regulatory agency, thereby circumventing any position limits 

that apply to their trading on the futures market. 129 7 U.S.C. Sec. 7(d). 130 Under the CEA, electronic trading facilities that trade energy commodities are subject to 

‘‘such rules and regulations as the Commission may prescribe if necessary to ensure timely dissemination by the electronic trading facility of price, trading, volume, and other trading data 

to the extent appropriate, if the Commission determines that the electronic trading facility performs a significant price discovery function for transactions in the cash market for the commodity underlying any agreement, contract, or transaction executed or traded on the electronic 

trading facility.’’ 7 U.S.C. Sec. 2(h)(4)(D). 131 69 Fed. Reg. 43285 (July 20, 2004). 132 17 C.F.R. § 36.3(c)(2). 133 17 C.F.R. § 36.3(c)(2)(C). 

D. No Public Dissemination of Trading Data by OTC Electronic Markets 

Under the Commodity Exchange Act, regulated markets are 

required to publish daily information about settlement prices, volume, open interest, and opening and closing price ranges for all actively traded contracts.129 Under the Commodity Futures Modernization Act, OTC electronic markets must publish similar information if the CFTC determines that the market ‘‘performs a significant price discovery function’’ for the underlying cash market.130

Although there is substantial evidence that the ICE OTC electronic 

exchange performs such a price discovery function, the CFTC has 

not undertaken any effort to make this determination. The failure 

to even attempt to make this determination ignores the Congressional mandate expressed in the law that the OTC electronic exchanges that perform a price discovery function be as transparent 

to the public as the regulated futures exchanges. 

In 2004, the CFTC issued a rule setting forth the process and criteria it would use to determine whether an electronic exchange performed a price discovery function.131 However, the CFTC has not 

taken any action in the 2 years since that rule was issued to actually determine whether ICE or any other OTC electronic market 

meets these criteria. Under the 2004 rule, an ECM performs a 

price discovery function when it meets one of two specified criteria: 

(A) Cash market bids, offers or transactions are directly 

based on, or quoted at a differential to, the prices generated on the market on a more than occasional basis; 

or 

(B) The market’s prices are routinely disseminated in a 

widely distributed industry publication and are routinely consulted by industry participants in pricing 

cash market transactions.132

An ECM operating under the Section 2(h)(3) exemption must notify the CFTC when ‘‘it has reason to believe’’ either of these criteria are met, or if the ‘‘market holds itself out to the public as performing a price discovery function for the cash market for the commodity.’’ 133

If an ECM notifies the CFTC that it has reason to believe that 

it meets any of these criteria for performing a price discovery function, or the CFTC itself determines that an ECM appears to meet 

one of these criterion, then the CFTC must provide the ECM ‘‘with 

an opportunity for a hearing through the submission of written 

38

134 17 C.F.R. § 36.3(c)(2)(C)(iii). 135 Id. 136 17 C.F.R. § 36.3(c)(2)(C)(iv)(A). The information must be publicly disseminated no later 

than the business day following the day to which the information applies. Id. at Section 

36.3(c)(2)(C)(iv)(B). 

The 2004 rule also requires an exempt commercial market to inform the CFTC of those commodity contracts it is trading in reliance on the exemption set forth in Section 2(h)(3). Id. at 

Sec. 36.3(b)(1)(ii). The ECM must provide the CFTC with a description of the contract and weekly reports on the price, quantity, and other information the CFTC determines is appropriate for 

each trade in that commodity contract during the previous week. The facility may either provide 

this information in weekly reports or provide the CFTC with electronic access to the same information. Id. at Section 36.3(b)(1)(ii)(A) and (B). Additionally, the ECM must maintain records of 

complaints or allegations of fraud or manipulation, and forward any such complaints to the 

CFTC. Id. at Section 36.3(b)(1)(iii) and (iv). There is no requirement that the CFTC or an ECM 

provide this data to the public. 

In comments filed on the proposed rule, ICE contended that the CFMA did not give the 

CFTC authority to conduct regulatory oversight of trading on electronic trading facilities or to 

require electronic trading facilities to submit reports. The CFTC rejected this argument, noting 

that Congress expressly stated ECMs were still subject to the anti-fraud and anti-manipulation 

provisions of the CEA. ‘‘If the Commission is to have the ability to enforce those provisions, it 

must have access to meaningful information concerning transactions on ECMs.’’ 69 Fed. Reg. 

43287. The CFTC also dismissed the contention that allowing the CFTC staff to monitor trading 

through the installation of a view-only trading screen at the CFTC was sufficient to enable the 

CFTC to monitor those markets for fraud and manipulation. ‘‘The Commission has found that 

the information provided under the current electronic access option is neither as relevant, nor 

as useful, as anticipated.’’ Id. 69 Fed. Reg. 43286. It stated that the view-only access to computer screens provided to the CFTC by ICE ‘‘is not, in fact, equivalent to the large trader information received with respect to designated contract markets.’’ Id. The CFTC, however, has not 

used this section to require information on open interest or large trades. Hence, the information 

that is provided to the CFTC under this section does not serve to provide the CFTC with the 

type of large trader information necessary to detect and prevent manipulation. 137 ICE 10–K, at p. 4. 

data, views and arguments.’’ 134 After conducting such a hearing, 

and ‘‘consideration of all relevant matters,’’ the Commission ‘‘shall 

issue an order containing its determination whether the electronic 

trading facility performs a significant price discovery function’’ 

under this section.135

If the CFTC determines that an electronic trading facility performs a significant price discovery function, then the regulations 

require the facility to disseminate to the public, on a daily basis, 

the following information:

(1) Contract terms and conditions, or a product description, and trading conventions, mechanisms and practices; 

(2) Trading volume by commodity and, if available, open 

interest; [and] 

(3) The opening and closing prices or price ranges, the 

daily high and low prices, a volume-weighted price 

. . . or such other daily price information as proposed 

by the facility and approved by the Commission.136

Despite the 2004 regulations, to date, neither ICE—nor any 

other ECM—has informed the CFTC that it has reason to believe 

that its electronic exchange performs a price discovery function. 

Yet at the same time, ICE appears to have made that very claim 

to the Securities and Exchange Commission (SEC). In the Form 

10–K that ICE filed with the SEC on March 10, 2006, ICE identified price discovery as a core function of its over-the-counter markets: ‘‘Our participants, representing many of the world’s largest 

energy companies, leading financial institutions and proprietary 

trading firms, as well as natural gas distribution companies and 

utilities, rely on our platform for price discovery, hedging and risk 

management.’’ 137

39

138 ICE 10–K, at p. 13. 139See, e.g., ICE. The Energy Marketplace, at https://www.theice.com/profile.jhtml (last visited 

June 9, 2006) (‘‘IntercontinentalExchange is the world’s leading electronic marketplace for energy trading and price discovery. . . . ICE’s electronic trading platform offers direct, centralized 

access to trade execution and real-time price discovery through over 7,000 active screens at more 

than 1000 OTC and futures participant firms.’’); A Global Community of Energy Market Participants, at https://www.theice.com/customers.jhtml (last visited June 9, 2006) (‘‘Through ICE’s 

markets, participants have direct access to trade execution, real-time price information, market 

activity and unparallelled transparency in both futures and OTC energy markets. From the 

world’s leading oil majors, to funds, utilities and financial institutions, energy market participants rely on ICE.’’); Clearing, at https://www.theice.com/futures—clearing.jhtml (last visited 

June 9, 2006) (‘‘As the world’s leading electronic energy exchange, ICE provides an unsurpassed 

forum for price discovery and risk management.’’); ICE Platform, https://www.theice.com/ice—

platform.jhtml (last visited June 9, 2006) (ICE’s electronic platform is the gateway to an open 

marketplace—one in which each participant has access to real-time price discovery and trading 

functionality.’’). 140See, e.g., Statement of Jeffrey Sprecher, ICE Chairman and Chief Executive Officer, Intercontinental Announces 2003 Results, March 4, 2004, (‘‘ICE’s investment in the development of 

cleared OTC products was beneficial to a growing number of market participants who relied on 

clearing to ease credit constraints while managing risk. As a result, Intercontinental is well positioned to participate in the stabilizing OTC energy markets, and to facilitate the migration 

to electronic price discovery.’’), at https://www.theice.com/showpr.jhtml?id=558; Statement of JefContinued

ICE’s 10–K filing also describes its sale of a daily report containing price data about OTC transactions as a core business activity. ICE described its ‘‘OTC End of Day Report’’ as follows:

The OTC ICE Data end of day report is a comprehensive 

electronic summary of trading activity in our OTC markets. The report is published daily at 3:00 p.m. Eastern 

time and features indicative price statistics, such as last 

price, high price, low price, total volume-weighted average 

price, best bid, best offer, closing bid and closing offer, for 

all natural gas and power contracts that are traded or 

quoted on our platform. The end of day report also provides a summary of every transaction, which includes the 

price [and] the time stamp. . . .138

It is not apparent why traders and energy firms would pay for 

ICE Data’s End of Day Trader Reports if those reports did not provide valuable information about the data that is most useful to 

market participants—prices. Such price reports would appear to be 

useless or not worth the cost if the ICE trades did not perform a 

price discovery function. By generating valuable daily price data to 

industry participants, trading on ICE now performs a price discovery function. 

It is difficult to reconcile ICE’s daily trading reports and its 

statements to the SEC with its failure to notify the CFTC that its 

natural gas and electricity markets perform a price discovery function. As ICE states, most of the natural gas and power contracts 

traded in its OTC markets relate to ‘‘the prompt, or front 

month,’’—meaning the futures contract that is closest to the spot 

or cash market. Hence, the prices of these contracts as traded on 

ICE have a direct influence on the prices of these commodities in 

the cash market. 

Although the CFTC’s 2004 rulemaking requires an ECM that has 

reason to believe it is performing a price discovery function to notify the CFTC, the CFTC has retained authority to initiate a hearing to determine whether an ECM meets the criteria for performing a price discovery function. Despite numerous unqualified 

statements by ICE on its website, 139 in press releases, 140 and in 

40

frey Sprecher, Trading Technologies to Connect to ICE Energy Markets, March 17, 2004 (‘‘We 

look forward to together delivering alternatives to the markeplace for electronic price discovery 

and expanded market access to a diverse group of participants.’’), at https://www.theice.com/

showpr.jhtml?id=557. 141 Comments at a conference, May 9, 2006. An audio replay of Mr. Sprecher’s presentation 

can be downloaded from the ICE website, at https://www.theice.com/showpr.jhtml?id=2321 (last 

visited June 9, 2006). 142 Letter from IPE to CFTC, May 14, 1999. 

filings with the SEC that its OTC electronic trading facility performs a price discovery function, the CFTC has failed to initiate 

any type of inquiry to evaluate this issue. In light of the substantial evidence that the ICE electronic exchange is performing a price 

discovery function, the CFTC appears to have failed to carry out its 

statutory mandate to require ICE to publicly disseminate trading 

data. 

V. THE COP’S BLIND EYE: U.S. ENERGY TRADES ON FOREIGN EXCHANGES 

‘‘Growth in our industry is certainly exceeding the ability of the 

regulators to get their heads around it.’’ 

—Jeffrey Sprecher, ICE Chairman and CEO 141

ICE now operates two types of electronic energy exchanges. One 

is the ICE OTC exchange, which is registered in the United States. 

The other is ICE Futures, which is a futures exchange registered 

in London and regulated by the United Kingdom Financial Services 

Authority (FSA). Until January of this year, ICE Futures traded 

solely in European-based energy commodities. Within the past few 

months, however, the CFTC has permitted ICE Futures in London 

to use its trading terminals within the United States for the trading of U.S. energy commodities, including U.S. crude oil, U.S. gasoline, and U.S. home heating oil. The result is that persons located 

in the United States seeking to trade key U.S. energy commodities 

now can avoid all U.S. market oversight and reporting requirements simply by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York. 

A. U.S. Energy Commodities Traded on Foreign Exchanges 

In May 1999, the London International Petroleum Exchange 

(IPE) petitioned the CFTC to permit the IPE to make its electronic 

trading system available to IPE members in the United States. 

Specifically, the IPE desired that its members who were registered 

with the CFTC be able to electronically place orders from within 

the United States, or to electronically submit the orders of customers within the United States, to the IPE in London, without requiring the IPE to be fully regulated as a U.S. futures market 

under the CEA. The IPE’s petition contained general information 

about the IPE’s operations, the contracts traded on the IPE, its 

floor and trading procedures, a description of the United Kingdom 

regulatory structure applicable to the IPE, the IPE’s procedures for 

compliance with the U.K. regulations, and procedures for sharing 

information with the CFTC.142

In November 1999, the CFTC granted the IPE’s request by releasing a ‘‘no-action’’ determination, permitting the IPE to allow its 

members to electronically trade from within the United States 

without having to designate the IPE as a U.S. futures exchange 

41

143 Notice of Statement of Commission Policy Regarding the Listing of New Futures and Options Contracts by Foreign Boards of Trade that Have Received Staff No-Action Relief to Place 

Electronic Trading Devices in the United States, 65 Fed. Reg. 41641 (July 6, 2000). On April 

14, 2006, the CFTC revised its policy to require a foreign board of trade to provide the CFTC 

with at least ten days’ notice prior to the commencement of trading from within the United 

States of any product on such board of trade. 71 Fed. Reg. 19877 (April 18, 2006). 144Prior to the listing of a WTI contract on the ICE Futures exchange, ICE offered a WTI 

contract for trading on its OTC electronic exchange. In a recent interview, ICE Chairman and 

CEO Jeffrey Sprecher described how ICE’s development of a successful OTC contract for WTI 

paved the way for the introduction of the WTI contract on ICE Futures: 

To the outside world, we launched WTI and it came out with a very high adoption rate. But 

the reality is ICE was working on that contract for a year and a half prior to its launch. One 

unique thing about ICE is that we can take a product and launch it as a bilateral OTC contract 

allowing the energy trading community to trade it. While they trade it we can work out many 

of the details, such as the size of the contract, delivery aspects, tick size and those things. Then 

we can add clearing to it and bring in more of the funds and speculators—if we get that going, 

then we can make it a futures contract. That’s the process we went through with the WTI contract. It went from a bilateral swap to a cleared OTC contract to a futures contract. 

And we’re bringing other contracts through that conveyor belt process. In the first half of 

this year, we’re bringing clearing to 50 bilateral contracts that we already offered. 

ICE: ‘‘The market has spoken,’’ Futures & Options Week, April 24, 2006. As previously discussed, quantitative data on the WTI contract traded on the ICE OTC electronic exchange is 

not readily available. According to former Federal Reserve Chairman Greenspan’s recent testiContinued

under the CEA. The CFTC wrote that its position was ‘‘restricted 

to providing relief from the requirement that IPE obtain contract 

market designation pursuant to [the CEA] and regulatory requirements that flow specifically from the contract market designation 

requirement in the event that the above-reference contracts are 

made available in the United States.’’ The CFTC stated its ‘‘no-action position does not affect the Commission’s ability to bring appropriate action for fraud or manipulation.’’ It also stated that it 

retained the authority to ‘‘condition further, modify, suspend, terminate, or otherwise restrict the terms of the no-action relief provided herein, in its discretion.’’ The initial no-action letter permitted the trading of IPE’s natural gas, fuel oil, gas oil, and Brent 

crude oil contracts through IPE terminals in the United States. 

Subsequently, in 2002 and 2003, following the purchase of the IPE 

by ICE, the IPE received permission from the CFTC, through several amendments to the initial no-action letter, to trade U.K. natural gas, gas oil, and Brent crude oil contracts through the ICE 

electronic trading platform. 

B. ICE Futures Trading of U.S. Energy Commodities 

In mid-January 2006, ICE notified the CFTC that on February 

3, 2006, it would begin trading a U.S. energy commodity—West 

Texas Intermediate crude oil, a crude oil that is produced in the 

United States—on its ICE Futures exchange in London, and that 

it would offer this contract for trading on its electronic trading devices that were operating in the United States under the no-action 

letters the CFTC had previously issued. Under CFTC policy in effect at the time, ICE Futures did not need an additional no-action 

letter to make this new contract available for trading in the United 

States; rather, ICE Futures needed only to provide prior notice to 

the CFTC.143 This marked the first time that futures contracts for 

crude oil produced in the United States was traded on an exchange 

outside of the United States. 

Since ICE began trading WTI crude oil futures on its London exchange, it has steadily increased its share of the WTI crude oil 

furtures market.144 According to CFTC data, as of the end of April 

42

mony, during this period hedge funds and other institutional investors conducted a substantial 

amount of trading in crude oil in this market. 145 CFTC data provided to the Subcommittee. 146Market Forces: Big Oil increases market reach, Energy Compass, March 24, 2006. 

2006, nearly 30 percent of WTI crude oil futures were traded on 

ICE Futures.145 According to one energy trade publication, several 

of the large ICE stakeholders—BP, Total, and Morgan Stanley—

were ‘‘doing their best to support the ICE WTI contract, with Goldman Sachs directing its traders to use the ICE platform rather 

than Nymex.’’ 146

ICE Futures has further expanded its reach into the U.S. energy 

commodities market. In addition to trading WTI crude oil futures 

on its London exchange, in April 2006, ICE Futures began trading 

futures in U.S. gasoline and home heating oil. 

C. Implications for Oversight of U.S. Commodity Markets 

The trading of U.S. energy commodities on the ICE Futures exchange in London from terminals within the United States permits 

traders within the United States to trade U.S. energy commodities 

without any U.S. oversight or regulation. This type of unregulated 

trading of a U.S. commodity from within the United States undermines the very purpose of the Commodity Exchange Act and the 

central mission of the CFTC—to prevent manipulation or excessive 

speculation of commodity prices ‘‘to the detriment of the producer 

or the consumer and the persons handling commodities.’’ Without 

information about the trading of U.S. energy commodities, the 

CFTC cannot undertake, let alone accomplish, its mission. 

Furthermore, the trading of U.S. energy commodities on foreign 

or unregulated OTC exchanges without any reporting to the CFTC 

undermines the reporting system for commodities traded on CFTCregulated exchanges. With respect to traders that trade on both exchanges, the CFTC will be provided only partial data regarding the 

extent of their trades, thereby affecting the accuracy of the data to 

the CFTC. 

For example, a trader wishing to disguise its position on the regulated market, or give the regulated market a false impression of 

its trading, could buy and sell an identical number of futures in different months; this would then be reported to the CFTC as a 

spread position. That same trader then could offset one of those positions, say, for example, the short position, on the unregulated exchange. In this example, the trader would have a net long position, 

but it would appear to the CFTC and the public, through the Commitment of Traders Report, as a spread position. Hence, both the 

CFTC and the public would have an inaccurate view of the composition of the market. Only the trader would know the correct position. It is not difficult to imagine other schemes to distort the 

CFTC’s market data. 

For the CFTC to be able to carry out its fundamental mission to 

protect the integrity of the U.S. commodity futures markets, all 

U.S. traders of U.S. energy futures or futures-like contracts must 

keep records and report large trades to the CFTC, regardless of 

where the trade takes place—on the NYMEX, an electronic exchange, or a foreign exchange. To continue the present situation, 

in which the CFTC does not police two of three major markets 

43

trading U.S. energy futures, is to turn a blind eye to an increasingly large segment of these markets, thereby impairing the ability 

to detect, prevent, and prosecute market manipulation and fraud. 

The United States needs to put the cop back on the beat in all of 

these key energy markets.

44

147Matthew R. Simmons, Oil Prices, Volatility and Speculation, Presentation at the IEA/

NYMEX Conference, New York, New York, November 23, 2004. 148 Id. 149 In some cases, a hedge fund or other type of managed money fund may purchase futures 

for portfolio diversification to limit the fund’s financial exposure to energy prices fluctuations. 150The CFTC defines ‘‘open interest’’ as ‘‘the total of all futures and/or option contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc.’’ Open interest held 

or controlled by a trader is referred to as that trader’s position. For the CFTC’s Commitment 

of Traders Futures and Options Combined Report, the open interest in options is calculated by 

mathematically computing the futures-equivalent of the unexercised option contracts. CFTC 

Backgrounder, The Commitment of Traders Report, at CFTC website, at http://www.cftc.gov/opa/

backgrouder/opacot596.htm. 

APPENDIX 

MEASURING THE INCREASE IN SPECULATIVE TRADING 

A. CFTC Commitment of Traders Report 

One of the few direct, quantitative measures of the increased 

trading activity by speculative money managers in energy futures 

trading is provided by the Commodity Futures Trading Commission (CFTC) weekly report on futures trading activity. The CFTC 

publishes, on a weekly basis, a ‘‘Commitment of Traders’’ (COT) 

Report, providing, for each commodity traded on a U.S. futures exchange, statistical information regarding the extent and nature of 

trading in that commodity in the previous week. Oil industry consultant and analyst Matthew R. Simmons characterizes the COT 

Report as, ‘‘In the Land of the Blind, it is the ‘One-Eyed King.’ ’’ 147

The report ‘‘tells who the players are,’’ provides a ‘‘snapshot of 

Tuesday market close,’’ and can ‘‘spot some long-term trends (after 

the fact).’’ 148

For trades conducted on the regulated futures markets, the 

CFTC regulations require clearing houses and brokers to report, on 

a daily basis, futures positions on their books for traders that hold 

positions exceeding certain levels established by the CFTC (‘‘reportable positions’’). Traders holding futures positions are also required 

to file a report with the CFTC describing the nature of their business; the CFTC uses this data to classify each trader as ‘‘commercial’’ or ‘‘non-commercial.’’ Commercial traders are those entities 

that use the commodity as part of their business, and hence use 

the futures markets for hedging; non-commercial traders are all 

other traders. The non-commercial category includes commodity 

pools, pension funds, hedge funds, and other types of managed 

money funds. Generally, non-commercial traders do not use the 

commodity in their normal course of business or purchase futures 

to hedge their exposure to changes in the price of those commodities; they are instead engaged in market speculation to profit from 

price changes.149

The COT Report provides, for each commodity: the total amount 

of open interest in that commodity, meaning the total of all futures 

and option contracts entered into and not yet offset by another 

transaction or delivery of the commodity.150 The COT Report also 

provides the number of outstanding short and long positions held 

by commercial and non-commercial traders, respectively; and the 

number of ‘‘spreading’’ positions held by non-commercial traders. 

Spreading includes each trader’s reported long and short positions 

45

151For example, a trader might purchase a contract in the near-future, and, at the same time, 

sell a longer-term futures contract. This would be reported to the CFTC as a spread position. 

If the trader purchased two long futures contracts, and sold one short contract, it would be reported as one spread contract and one long contract. 152 Haigh, Hranaiova and Overdahl, at pp. 3–4. 

in the same commodity, to the extent they are balanced.151 The report also identifies the number of long and short non-reportable positions, which is derived from the total open interest and the data 

on the reportable positions. Generally, reportable positions represent from 70–90 percent of the particular market.152 The COT 

Report also provides data on the percentage of open interest and 

various other positions held by the largest four and largest eight 

traders. This data provides a gauge on how much of the market is 

dominated by the largest traders. 

B. Increased Speculative Trading on the NYMEX 

The increase in trading in oil and natural gas futures and options by money managers and speculators is seen clearly in the 

trends in the CFTC trader data over the past several years. Figure 

A–1 shows the increasing amount of open interest in crude oil and 

natural gas contracts traded on the NYMEX since 1998.

Figure A–1. The open interest in both crude oil and natural gas contracts has 

doubled since 2004. Data source: CFTC COT data.

A breakdown of the crude oil and natural gas open interest by 

the various types of positions tracked by the CFTC shows how 

there has been a shift in the composition of trading on the NYMEX 

over the past couple of years. As Figure A–2 demonstrates for 

crude oil contracts, and Figure A–3 demonstrates for natural gas 


28640.007
46

contracts, in the past few years there has been a significant increase in the amount of open interest held by non-commercial traders. In both markets, there has been a large increase in the amount 

of spreading—i.e. holding of both long and short positions that do 

not offset each other—by non-commercial traders. In short, the 

amount of speculative trading in crude oil and natural contracts 

has increased significantly in the past 2 years.

Figure A–2. The amount of speculative trading in crude oil contracts has increased significantly in the past 2 years, as evidenced by the increase in the number of non-commercial spread positions. Data source: CFTC.

Figure A–3. The amount of speculative trading in natural gas contracts has increased significantly in the past 2 years, as evidenced by the increase in the number of non-commercial spread positions. Data source: CFTC.


28640.008 28640.009
47

Table A–1 presents similar information in tabular format. Additionally, Table A–1 shows the increase in the number of non-commercial traders over this same period. Although the number of 

commercial traders holding short and long positions has not varied 

by more than about 20 percent during this period, the number of 

non-commercial traders holding spread positions has quadrupled, 

so that there are now more non-commercial traders than commercial traders.

Table A–1. CFTC data shows a significant increase in the number of non-commercial traders and the percentage of open interest held by non-commercial traders in the past few years. Data source: CFTC.

Figure A–4 shows how the influx of investment into longer-term 

futures has raised the prices of futures contracts above the price 

of the nearer-term futures contracts (‘‘contango’’). The relative increase in the price of longer-term futures contracts has provided a 

financial incentive for oil companies and refiners to purchase additional oil and put it into inventory.


28640.011
48

153 ICE Form 10–Q, at p. 22. 154 ICE Form 10–K, at p. 73. 155 ICE Form 10–Q, at p. 22 (each contract representing one million BTUs). 

Figure A–4. In recent years longer-term futures prices have increased to levels 

higher than nearer-term futures contracts, providing a financial incentive to purchase and store oil. For years 1999–2002, the dates reflect the forward curve as 

of December 1 of that year. For other years, the dates reflect the foward curve 

as of December 2, 2003, December 2, 2004, December 6, 2005, and April 1, 2006. 

Data source: NYMEX. 

C. Increased Speculative Trading on ICE 

Because there are no reporting requirements for OTC trading, 

there are no publicly available quantitative measures of the extent 

of speculative trading in the OTC markets. Industry participants 

are not required to file large trader reports and the CFTC does not 

have any data to compile Commitment of Trader Reports. What little information has been publicly disclosed, however, indicates 

there has been a substantial growth in speculative activity on the 

ICE OTC market. 

ICE financial statistics show a tripling in the amount of OTC 

commission fees it has received from a level of approximately $8 

million in the fourth quarter of 2004 to approximately $24 million 

in the first quarter of 2006.153 ICE reported an increase in the 

number of cleared Henry Hub natural gas contracts from 4,512,000 

in 2003 to 15,887,000 in 2004 and then to 42,760,000 in 2005.154

In the first 3 months of 2006, ICE reported a trading volume of 

44,906 million North American natural gas contracts as compared 

to a trading volume of 23,838 million gas contracts for the first 3 

months of 2003.155


28640.010
49

156The term ‘‘local’’ refers to an individual who commits his or her own capital for speculative 

trading on an electronic exchange. A ‘‘proprietary trader’’ is a professional trader hired by a firm 

to trade that firm’s money. See, e.g., Jim Kharouf, Prop Shops and Trading Schools Raise the 

Bar, Stocks, Futures & Options Magazine, January 2004.

The ICE financial statistics indicate that a large part of this 

growth can be attributed to increased trading by hedge funds, managed money, and individual speculators. Table A–2 provides the 

most recent breakdown provided by ICE of the composition of ICE 

participants.

Table A–2

ICE OTC Participants 

OTC Participants Trading

(as % of total commissions) 

Year ended December 31, 

2003 2004 2005 

Commercial companies (including 

merchant energy) 64.1 56.5 48.8

Banks and financial institutions 31.3 22.4 20.5

Hedge funds, locals and proprietary 

trading shops 156 4.6 21.1 30.7

Table A–2. Hedge funds and other speculators have significantly increased 

their use of OTC electronic markets. Data source: ICE Form 10–K, at p. 73. 

Æ