CFTC Energy Position Limits Proposition for the Bigs

The Commodity Futures Trading Commission has proposed new position limit rules for the large trading houses. The new rules will only affect the ten largest position holders. Will these rules make a difference for energy traders? In a nutshell, the rules are likely to not even affect the bigs.

The key points of the new rules are as follows:
1. Position imposed limits on oil, natural gas, heating oil, RBOB gas traded on NYMEX and ICE
2. For all trading months combined limits at 10% on first 25,000 contracts open interest,2.5% next 25,000 lots
3. Single month position limits proposed at 2/3 of the all trading months combined position limits
4. Spot month position limit for contracts physically settled at 25% of estimated deliverable supply

Trading houses knew these rules were coming when Gary Gensler took office in May. The CFTC has been under pressure to strengthen limits due to populace thinking that large speculators were the cause of crude's run up to $147. Since bona fide commodity inventory hedging is exempt from the new rules, most of the bigs have enlarged their physical product trading desks.

The trading limits proposed are very generous. At current trading levels the new rules will have virtually no impact on market liquidity. Had the CFTC wanted to make an impact on speculation the focus should have been on margin requirements. The downside would be higher costs to producers and refiners which would inevitably be passed along to end users, ultimately raising the price of refined products.

It was interesting to see the energy complex remain virtually unchanged Thursday when the rules were released. The market then pulled back on Friday with the exception of nat gas rising .10. The pull back was more related to a strengthening US dollar vs the euro rather than large traders exiting long positions in fear of the new rules. For now, do not expect the trading limits to have any affect. This may frustrate law makers who may seek stronger action should the energy complex break through to new highs in ninety days when the proposition is scheduled to go into effect.