CFTC: "There Will Be Blood"

The US Commodities Futures Trading Commission ("CFTC") has announced that it has been, and will continue to be, monitoring oil futures markets, both at home and abroad, more closely to ensure that the process reflects "fundamental economic forces of supply and demand, free of manipulation and fraud." Apparently the investigation began in December of 2007, just after oil prices hit $90 per barrel. The CFTC stated that they normally conduct these types of investigations in secret, but because of the extraordinary leap in the price of oil over the past few months, were announcing their investigation to the public.

We all know what pervasive fraud on the market can do to a micro-economy (see WorldCom, Enron). What is interesting in this case is, first, that the CFTC is actually investigating oil futures market practices before any bad actors get caught with their hand in the cookie jar, and, second, that the CFTC has announced its investigation.

We are used to seeing the feds investigate bad actors in the financial markets. Anyone who has taken a look at the SEC rules can attest to the fact that the Feds have set up an elaborate scheme of regulations and pitfalls for would be fraudulent traders. What we are not used to seeing is a large-scale investigation of an entire market, especially one that occurs before the investors dump their shares and send the market plunging into oblivion (some might argue that's not such a bad thing for oil prices; I am not one of those people). Several possible explanations come to mind for why the CFTC might have launched its investigation in December instead of, say the day after oil prices plunge to mid-1990's levels and the futures market crashes. I don't want to speculate about the CFTC's motives, but it seems that either there was some evidence of fraudulent practices on the futures market that surfaced around Dec. 2007 or the CFTC is taking a more proactive approach than market regulators have in the past, oh let's say 7 years.

The fact that the CFTC actually announced its investigation is, at least according to the CFTC, a fairly extraordinary measure. Apparently they normally keep their investigations quiet and it is only after the recent massive jumps in the price of oil (30% or so in 5 months) that the regulators have disclosed their interest in the oil futures market. The CFTC's motivations for this one seem a bit more obvious- this is probably a shot across the bow for some institutional investors to go ahead and start cleaning up their practices and abandoning any market positions that might appear, well, fraudulent or manipulative. I'm interested to see where this goes, but, given the fact that the Feds have warned any investors who might be engaged in illicit practices, I'd say that we'll either see a gradual withdrawal from the market by those who might be tempted to engage in fraud or manipulative practices (most likely), or we'll see one or more big-time investors dump their shares suddenly, and send the price of a barrel of oil plummeting.

For my part, I'll keep watching the prices of oil, natural gas and other commodities with bated breath, and I am hopeful that we will see a gradual decline in prices that keeps a relative stasis between supply and demand because a sudden drop in prices, or a period of extreme volatility can be just as damaging as the unprecedented increases of late.