Recent swings in the price of oil have the commodity, exchange traded funds (ETFs) and the way it’s traded under an intense microscope. What could it mean for these popular trading vehicles?

Federal regulators have announced that they’re considering trading restrictions on hedge funds and other “speculative” traders in markets for oil, natural gas and other energy forms, reports Edmund L. Andrews for The New York Times.

The Commodity Futures Trading Commission (CFTC) announced several things this morning:

  • It will consider new limits on the volume of energy futures contracts that financial investors will be allowed to hold
  • It will also publish more detailed information about the aggregate activity of hedge funds and traders who arbitrage between domestic and foreign energy prices
  • Several hearings will be held this month and next; the first will examine whether to impose federal “speculative limits” on energy futures contracts

More and more critics are blaming speculators for the wild swings in oil: last July, it nearly reached $150 a barrel, then plunged to $33 before rising to about $70 in recent weeks. Even as oil prices climbed this year, there were questions as to why because demand is still weak and inventories are rising.

Speculators are defined by federal officials as those who are “non-commercial” – essentially financial investors who aren’t users or producers of those commodities, and are primarily interested in betting on the direction of prices.

Not everyone agrees that speculators need to have a lower profile, though. In a Bloomberg report, Emanual Balarie, managing director for Balarie Capital Management in Chicago, says if speculators leave the markets, it becomes less liquid and there’s weaker price discovery.

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