Chairman Bingaman's June 9th Letter to the CFTC

June 9, 2011
12:24 PM
Chairman Gary Gensler
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Dear Chairman Gensler:
I am writing to request information about price formation in the oil market.  I would like to better understand how the Commodity Futures Trading Commission (CFTC) interprets recent oil market price movement, and whether CFTC believes that those movements are responding primarily to developments in oil production and consumption, or whether prices are primarily being influenced by other factors.
Oil price pressure resulting from the unrest in the Middle East, and Libya in particular, was expected.  However, as Libyan oil has remained mostly offline for over two months, U.S. oil stocks have remained at levels that are high compared to historical norms.  Saudi Arabia, which holds significant spare oil production capacity, has noted that it has satisfied all buyer requests for oil.  These facts suggest that there is plenty of oil available to meet current world oil demand, despite the lost oil production in Libya.
Meanwhile, oil price volatility has increased, rather than decreased, as the situation in Libya has become clearer, and the imminent threat to world oil demand has abated.
Could you please explain:
  • How CFTC prevents major market participants, which are invested in both physical and financial aspects of the marketplace, from “talking their books.”
    • Within large banks, is there a legal firewall between commodities research groups and trading desks?
    • How is any firewall between research and trading enforced?
    • How would CFTC know if that firewall were breached? 
    • What would the penalty for such a breach be?
  • To what extent major market makers, such as large banks, have incentive to exacerbate existing volatility in the market place.
    • Does CFTC track and assess sources of market volatility?
    • How does CFTC explain the increase in oil price volatility in recent years?
  • How increased margin calls across the commodities complex has affected price formation in each of the commodities.
    • Why did the price of oil fall, in association with the fall in the price of silver, after margins were dramatically increased for silver in early May 2011?
    • How does CFTC explain the Energy Information Administration’s finding that the price of oil is now more strongly correlated with other non-energy commodity prices than it is with other energy prices, such as the price for natural gas? 
    • What would be the expected outcome of increased margin call in the oil market?
Your response to these questions by July 1, 2011, would be very much appreciated.
Jeff Bingaman
Committee on Energy and Natural Resources